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, 1996 Commission file number: 0-2047
CAPITOL TRANSAMERICA CORPORATION (CTC)
(Exact name of registrant as specified in its charter)
A WISCONSIN CORPORATION 39-1052658
4610 University Avenue
Madison, Wisconsin 53705-0900
Registrant's telephone number, including area code: (608) 231-4450
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the regis-
trant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Based on the closing average of the high (19 1/4) and low price (18), the ag-
gregate market value of voting stock held by non-affiliates of the registrant
as of June 30, 1996 was approximately $137,531,731.
Indicate the number of shares of each of the issuer's class of common stock, as
of the latest practicable date:
At June 30, 1996
Common Stock, $1.00 Par Value;
Issued: 7,594,085
Outstanding: 7,384,254
Total Pages: 21
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Part I
Financial Information Page
Consolidated Financial Statements 3 - 7
Notes to Consolidated Financial Statements 8 - 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10 - 12
Condensed Statutory Financial
Statements of Insurance Subsidiaries 13
Part II
Other Information and Exhibits
Other Disclosures 15
Officers and Directors 16
Signatures 17
Exhibit 1 (Press Release) 18 - 21
2
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
<S> <C> <C> <C>
ASSETS
Investments:
Available-for-sale investment securities, at fair value
U.S. Government bonds (amortized cost $587,678, $591,928
and $604,290, respectively) $ 592,847 $ 601,571 $ 610,204
State, municipal and political subdivision bonds (amortized
cost $67,992,044, $70,020,468 and $62,049,512, respectively) 72,522,521 77,122,077 67,203,473
Corporate bonds and notes (amortized cost $883,890,
$880,859 and $1,377,904, respectively) 776,189 946,193 1,440,436
Equity securities:
Common stock (cost $55,868,965, $50,412,460 and
$40,256,061, respectively) 70,722,540 63,141,401 45,963,977
Nonredeemable preferred stock (cost $5,442,776, $3,868,836
and $3,771,686, respectively) 5,927,661 4,054,200 3,733,750
Investment real estate, at cost, net of depreciation 1,435,463 1,435,486 1,428,653
Short-term investments, at cost which
approximates fair value 5,971,861 1,915,795 3,508,544
Total Investments 157,949,082 149,216,723 123,889,037
Cash 358,854 602,775 29,731
Accrued investment income 1,652,373 1,718,254 1,449,723
Receivables from agents, insureds and others, less allowance for
doubtful accounts of $350,000, $320,000 and $295,000, respectively 17,375,980 11,874,125 13,306,733
Balances due from reinsurers 308,154 630,448 448,933
Funds held by ceding reinsurers 78,385 77,117 77,117
Reinsurance recoverable on unpaid losses 43,167 45,321 70,602
Reinsurance recoverable on paid losses 94,289 568,379 334,952
Deferred insurance acquisition costs 11,036,068 9,228,868 9,080,575
Prepaid reinsurance premiums 565,540 897,049 795,324
Due from securities brokers - 215,165 1,003,122
Income taxes receivable - 110,091 -
Other assets 1,672,638 446,263 1,077,824
Total Assets $191,134,530 $175,630,578 $151,563,673
</TABLE>
3
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
<S> <C> <C> <C>
LIABILITIES
Policy liabilities and accruals:
Reserve for losses $ 26,125,993 $ 25,679,644 $ 21,963,286
Reserve for loss adjustment expenses 12,401,474 12,904,440 10,334,611
Unearned premiums 38,308,476 31,555,728 29,528,968
Total Policy Liabilities and Accruals 76,835,943 70,139,812 61,826,865
Accounts payable 3,979,581 4,362,308 3,053,475
Dividends payable - 745,009 -
Due to securities brokers 910,282 370,123 114,512
Balances due to reinsurers 1,748,027 1,175,565 1,335,207
Accrued premium taxes 251,885 382,544 98,523
Income taxes payable 1,416,558 - 398,699
Deferred income taxes 5,885,598 5,801,337 3,140,988
Total Other Liabilities 14,191,931 12,836,886 8,141,404
Total Liabilities 91,027,874 82,976,698 69,968,269
SHAREHOLDERS' INVESTMENT
Common stock, $1.00 par value, authorized 15,000,000 shares,
issued 7,594,085, 6,899,060 and 6,890,928, respectively 7,594,085 6,899,060 6,890,928
Common stock distributable, 689,545 shares at $1.00 par value - 689,545 -
Paid-in surplus 21,004,764 20,949,100 7,979,299
Net unrealized appreciation (depreciation) on investment securities
carried at fair value, net of deferred taxes of $6,720,579, $6,830,903
and $3,703,411, respectively 13,045,826 13,259,988 7,188,976
Retained earnings 58,783,688 51,177,894 59,857,908
Shareholders' investment before treasury stock 100,428,363 92,975,587 81,917,111
Treasury stock, 209,831, 209,831 and 191,273 shares,
respectively, at cost (321,707) (321,707) (321,707)
Total Shareholders' Investment 100,106,656 92,653,880 81,595,404
Total Liabilities and Shareholders' Investment $191,134,530 $175,630,578 $151,563,673
Book Value Per Share $ 13.56 $ 12.55 $ 11.07
Shares Outstanding 7,384,254 7,378,774 7,370,189
</TABLE>
4
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
For the six Months For the Three Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUES
Premiums earned $ 35,819,095 $ 30,131,881 $ 18,655,521 $ 16,316,961
Net investment income 3,496,671 3,112,091 1,787,016 1,568,942
Realized investment gains 1,325,457 869,052 1,209,198 848,827
Other revenues 50,453 127,208 18,704 29,124
Total Revenues 40,691,676 34,240,232 21,670,439 18,763,854
LOSSES AND EXPENSES INCURRED
Losses incurred 13,050,185 10,826,062 6,121,104 6,020,115
Loss adjustment expenses incurred 2,571,949 4,502,266 925,389 2,378,691
Underwriting, acquisition and
insurance expenses 13,509,160 10,428,169 7,472,757 5,711,720
Increase in deferred insurance
acquisition costs (1,807,200) (1,365,186) (1,417,393) (849,172)
Other expenses 557,599 364,434 244,678 107,026
Total Losses and Expenses Incurred 27,881,693 24,755,745 13,346,535 13,368,380
Income from operations before
income taxes 12,809,983 9,484,487 8,323,904 5,395,474
Income tax expense
Current 4,147,468 2,268,049 2,977,900 1,293,385
Deferred (419,864) 310,495 (456,413) (229,235)
3,727,604 2,578,544 2,521,487 1,522,620
Net Income $ 9,082,379 $ 6,905,943 $ 5,802,417 $ 3,872,854
INCOME PER SHARE $ 1.23 $ 0.94 $ 0.79 $ 0.53
Weighted Average Number of Shares Outstanding 7,377,296 7,354,747 7,377,296 7,354,747
5
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS INVESTMENT
<CAPTION>
Unrealized
Common Appreciation
Common Stock (Depreciation)
Stock Distributable on Securities
(Par Value (Par Value Paid-In Carried at Retained Treasury
$1.00) $1.00) Surplus Fair Value Earnings Stock
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ 6,846,410 $ - $ 7,823,147 $ 3,469,526 $47,848,653 $ (339,069)
Net income - - - - 9,247,240 -
Unrealized depreciation on available-for
sale securities, net of deferred taxes - - - (4,126,269) - -
Stock options exercised 31,186 - 108,524 - - 8,444
Cash dividends declared - - - - (2,938,618) -
Balance, December 31, 1994 6,877,596 - 7,931,671 (656,743) 54,157,275 (330,625)
Net income - - - - 13,930,406 -
Unrealized appreciation on available-for
sale securities, net of deferred taxes - - - 13,916,731 - -
Stock options exercised 21,464 - 88,460 - - 8,918
Stock dividend declared - 689,545 12,928,969 - (13,618,514) -
Cash dividend declared - - - - (3,291,273) -
Balance, December 31, 1995 6,899,060 689,545 20,949,100 13,259,988 51,177,894 (321,707)
Net income - - - - 9,082,379 -
Unrealized depreciation on available-for
sale securities, net of deferred taxes - - - (214,162) - -
Stock options exercised 5,480 - 55,664 - - -
Stock dividend issued 689,545 (689,545) - - - -
Cash dividend declared - - - - (1,476,585) -
Balance, June 30, 1996 $ 7,594,085 $ - $21,004,764 $13,045,826 $58,783,688 $ (321,707)
6
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
June 30, December 31, June 30,
1996 1995 1995
Cash flows provided by operating activities:
<S> <C> <C> <C>
Net Income $ 9,082,379 $ 13,930,406 $ 6,905,943
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 268,743 423,119 172,905
Realized investment gains (1,325,457) (3,587,323) (869,052)
Change in:
Deferred insurance acquisition costs (1,807,200) (1,513,479) (1,365,186)
Unearned premiums 6,752,748 4,761,479 2,734,719
Allowance for doubtful accounts receivable from agents 30,000 65,785 30,000
Accrued investment income 65,881 (352,131) (83,600)
Receivables from agents, insureds and others (5,531,855) (2,595,686) (3,992,509)
Balances due to/from reinsurers 894,756 (154,893) 186,264
Reinsurance recoverable on paid and unpaid losses 476,244 (547,078) (338,932)
Funds held by ceding reinsurers (1,268) 60,305 60,305
Income taxes payable 1,526,649 371,620 880,410
Deferred income taxes 194,585 (156,647) 310,495
Due to/from securities brokers 755,324 (145,042) (1,188,610)
Prepaid reinsurance premiums 331,509 (270,011) (168,286)
Other assets (771,620) 294,732 (416,726)
Reserve for losses and loss adjustment expenses (56,617) 11,108,761 4,822,574
Accounts payable (382,728) 448,636 (860,197)
Accrued premium taxes (130,659) 112,822 (171,199)
Net cash provided by operating activities 10,371,414 22,255,375 6,649,318
Cash flows provided by (used for) investing activities:
Proceeds from sales of available-for-sale investments 2,692,570 21,046,919 11,458,982
Purchases of available-for-sale investments (14,411,841) (47,289,410) (22,652,896)
Maturities of available-for-sale investments 3,971,419 6,447,108 4,827,164
Purchase of depreciable assets (707,035) (683,115) (370,725)
Net cash used for investing activities (8,454,887) (20,478,498) (6,737,475)
Cash flows provided by (used for) financing activities:
Cash dividends paid (2,221,592) (2,546,264) (1,205,310)
Stock options exercised 61,144 109,924 60,960
Net proceeds from sale of treasury stock - 8,918 8,918
Net cash used for financing activities (2,160,448) (2,427,422) (1,135,432)
Net decrease in cash (243,921) (650,545) (1,223,589)
Cash, beginning of period 602,775 1,253,320 1,253,320
Cash, end of period $ 358,854 $ 602,775 $ 29,731
Cash paid during the year for:
Income taxes $ 1,775,000 $ 4,497,508 $ 1,395,000
Interest - - -
</TABLE>
7
CAPITOL TRANSAMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(1) Basis of Presentation
The condensed financial statements included herein of Capitol
Transamerica Corporation (the "Company"), other than the Consolidated
Balance Sheet as of December 31, 1995, and the Consolidated Statement
of Cash Flows as of December 31, 1995, have been prepared by the Compa-
ny without audit, pursuant to the rules and regulations of the
Securities Exchange Commission. Certain information and footnote dis-
closures normally included in financial statements prepared in accor-
dance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations.
Although the Company believes the disclosures are adequate to make the
information presented not misleading, it is suggested that these con-
densed financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's 1995 annual
report on Form 10-K. Wherever applicable, prior period's information
has been restated to reflect the December 28,1995 ten percent stock
dividend. Certain amounts in the prior periods consolidated financial
statements have been reclassified to conform with the 1996 presenta-
tion.
(2) Income Per Share
Net income per share is computed by dividing net income by the weighted
average number of shares of stock outstanding during the period.
Pior periods' information has been restated to reflect the stock
dividend.
(3) Income Taxes
Deferred income taxes reflect the net tax effects of temporary differ-
ences between the carrying amounts of assets and liabilities for finan-
cial statement purposes and the amounts used for income taxes.
(4) Common Stock Options
There were 5,480 options exercised during the six months ended June 30,
1996 and there were 13,332 options exercised during the six months
ended June 30, 1995. For further information regarding stock options,
refer to Note 6 of Notes to Consolidated Financial Statements included
in the Company's 1995 annual report.
(5) Dividends
1996
On April 30, 1996 a cash dividend of $.10 per share was declared to
shareholders of record June 12 and paid June 27, in the amount of
$738,426.
On February 23, 1996 a cash dividend of $.10 per share was declared to
shareholders of record March 11 and paid March 28 in the amount of
$738,171.
1995
On October 27, 1995 a ten percent stock dividend was declared to share-
holders of record December 28 and issued January 15, 1996.
On October 27, 1995 a cash dividend of $.10 per share was declared to
shareholders of record December 28 and paid January 15, 1996 in the
amount of $745,009.
On October 27, 1995 a cash dividend of $.10 per share was declared to
shareholders of record December 7 and paid December 22 in the amount
of $670,572.
8
On July 28, 1995 a cash dividend of $.10 per share was declared to
shareholders of record September 15, and paid September 29 in the
amount of $670,359.
On May 9, 1995 a cash dividend of $.10 per share was declared to share-
holders of record June 15 and paid June 30 in the amount of $670,006.
On January 27, 1995 a cash dividend of $.08 per share was declared to
shareholders of record March 17 and paid March 31 in the amount of
$535,304.
(6) Investments
Fixed maturities and equity securities are classified as available-for-
sale and, accordingly, are carried at fair value, with unrealized gains
and losses reported as a separate component of shareholders' investment
net of taxes. The cost of fixed maturities is adjusted for amortization
of premiums and discounts to maturity. Fixed maturities and equity
securities deemed to have declines in value that are other than tempo-
rary are written down through the statement of income to carrying
values equal to their estimated fair values.
Investment real estate is carried at cost net of accumulated deprecia-
tion of $147,986, $126,983 and $105,672 as of June 30, 1996, December
31, 1995 and June 30, 1995, respectively.
Cost of investments sold is determined under the specific identifica-
tion method.
(7) Contingent Liabilities
The Company is a defendant in certain lawsuits involving complaints
which demand damages and recoveries for claims and losses alledgedly
related to risks insured by the Company. In the opinion of management,
such lawsuits are routine in that they result from the ordinary course
of business in the insurance industry. The reserve for losses includes
management's estimates of the probable ultimate cost of settling all
losses involving lawsuits.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Capitol Transamerica Corporation (the "Company") is an insurance holding company
operating in 35 states which writes, through its insurance subsidiaries, both
property-casualty and fidelity-surety insurance. The property-casualty segement
accounts for approximately 75% of the business written while the fidelity-surety
segment accounts for approximately 25% of the Company's business.
The underwriting cylcles of the property-casualty insurance industry have been
characterized by peak periods of adequate rates, underwriting profits and lower
combined ratios, while the downward side of the cycle is characterized by inade-
quate rates, underwriting losses and, as a result, higher combined ratios. The
adequacy of premium rates is affected primarily by the severity and frequency of
claims which in turn are affected by natural disasters, regulatory measures and
court decisions which continue to uphold the "deep pocket" theory in awarding
against insurance companies. Unfortunately for the insurance industry, the trend
of increasing price competition has continued as has the number of significant
natural disasters. This combination has resulted in considerable reduction in
underwriting profitability for the industry as a whole.
Inflation also has a significant impact on the insurance industry in general, as
well as on the Company. Inflation creates higher claim costs, which are then
matched currently against premiums whose rating statistics were developed from
data of previous years. In recent inflationary periods, this has led to inade-
quate rate structures, since rate regualtors are slow to grant rate adjustments
at times when the overall economy is in an inflationary cycle. Studies have
shown that premium rates trail the claim experience by a period of two years or
more. Adequate premium rates continue to be of concern to the Company and the
property casulaty industry as a whole.
OPERATING RESULTS
As mentioned in the Overview section, the property-casualty insurance industry
is in a downward cycle. However, based on its operating results the Company is
in a peak period as it continues to generate considerable underwriting profits.
The Company's increase in premiums earned has been strictly due to volume
increases resulting from new product lines, expansion of coverages and entry in-
to new geographic territories. The ability to maintain a steady combined ratio,
typically 15 to 20 points below the industry average, is due to its basic phi-
losophy of generating underwriting profits. When the industry's cycle reverses,
the Company will be in an excellent position to take advantage of premium rate
increases which will benefit the Company's overall profitability.
For the six months ended June 30, 1996 gross premiums written increased 28.7%
over the same period in 1995. The Company's goal for 1996 is a 19% to 21% in-
crease in premiums written. Our plan to reach this goal includes geographic ex-
pansion and new product development. In late 1995, Capitol Indemnity
Corporation, the Company's primary insurance subsidiary, recently became
licensed in the states of Mississippi and Virginia. We are currently attempting
to obtain licensing in the states of Tennessee, North Carolina, and South
Carolina. The Company is also offering workers compensation insurance in
Illinois for the first time. This product had previously been offered only in
Wisconsin. Equipment breakdown insurance, covering breakdowns of items such as
telephone and computer systems, is a new product that we are offering in 1996.
Premiums earned are recognized as net revenues after reduction for reinsurance
ceded and after establishment of the provision for the pro-rata unearned portion
of premiums written. Net premiums earned totaled $35,819,095, $63,865,500 and
$30,131,881 for the respective periods; and net unearned premiums were
$38,308,476, $31,555,728 and $29,528,968 at each respective period.
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
<S> <C> <C> <C>
Gross Premiums Written $43,653,295 $70,878,492 $33,929,782
Reinsurance Ceded 749,943 2,521,524 1,231,468
Net Premiums Written $42,903,352 $68,356,968 $32,698,314
Net Premiums Earned $35,819,095 $63,865,500 $30,131,881
Net Unearned Premium Reserve $38,308,476 $31,555,728 $29,528,968
10
While the Company has encouraging reports with regards to premium writings, its
basic philosophy of generating underwriting profits has not changed. Our selec-
tive underwriting practices will continue in the future. The Company's under-
writing results can be measured by reference to the combined loss and expense
ratios. This tabulation includes the operating results of the two subsidiary
insurance companies on a statutory basis. Losses and loss adjustment expenses
are stated as a ratio of net premiums earned, while underwriting expenses are
stated as a ratio of net premiums written. The combined ratios were as follows:
<CAPTION>
June 30, December 31, June 30,
Insurance Operating Ratios (Statutory Basis): 1996 1995 1995
<S> <C> <C> <C>
Loss and Loss Adjustment Expenses 43.6% 53.2% 51.1%
Underwriting Expenses 32.5% 32.8% 32.5%
Combined Ratios 76.1% 86.0% 83.6%
The Company's combined loss and expense ratios continues to dramatically outperform the industry average
of 103.8% for the first qurter of 1996 and 107.3% for the year of 1995.
</TABLE>
REINSURANCE
The Company follows the customary practice of reinsuring with other companies,
i.e., ceding a portion of its exposure on the policies it has written. This pro-
gram of reinsurance permits the Company greater diversification of business and
the ability to write larger policies while limiting the extent of its maximum
net loss. It provides protection for the Company against unusually serious oc-
currences in which a number of claims could produce a large aggregate loss.
Management continually monitors the Company's reinsurance program to obtain pro-
tection that should be adequate to ensure the availability of funds for losses
while maintaining future growth.
NET INVESTMENT INCOME AND REALIZED GAINS
In accordance with SFAS No. 115, the Company's fixed maturities and equity se-
curites are classified as available-for-sale and are carried at fair value. The
unrealized gains and losses, net of tax, are reported as a separate component of
shareholders investment.
Interest and Dividend Income: Interest on fixed maturities is recorded as income
when earned and is adjusted for any amortization of purchase premium or dis-
count. Dividends on equity securities are recorded as income on ex-dividend
dates.
<TABLE>
<CAPTION>
June 30, December 31, June 30,
Investments: 1996 1995 1995
<S> <C> <C> <C>
Invested Assets $ 157,949,082 $ 149,216,723 $ 123,889,037
Net Investment Income 3,496,671 6,635,123 3,112,091
Percent of Return to
Average Carrying Value 5.3% 5.7% 5.7%
Realized Gains (Losses) 1,32,5457 3,587,323 869,052
Change in Unrealized (Losses)Gains $ (324,486) $ 21,085,956 $ 11,887,452
</TABLE>
The $324,000 decrease in unrealized gains for the first half of 1996 was com-
posed of a $2,400,000 increase in market value over cost of the Company's equi-
ty securities and a $2,724,000 decrease in market value over cost of our fixed
maturities. The decrease in the fixed maturities was caused by rising interest
rates during the first six months. The Company continued to move more of its in-
vestment portfolio into equity securities in the first half of 1996. Future
investment decisions will be determined based on the economy and the stock and
bond markets. Although net investment income for the first half of 1996 was up
12% over the first half of 1995, the overall rate of return on our investment
portfolio has decreased slightly. This slight decrease is due to the fact that,
as stated above, the Company is primarily investing its excess funds in common
stock, which has an investment income rate of return typically between 2% to
2.5%, but can have a much higher rate of return when considering market appreci-
ation. Net unrealized gains were $13,045,826, $13,259,988 and $7,188,976 as of
June 30, 1996, December 31, 1995 and June 30, 1995.
11
INCOME TAXES
Income tax expense is based on income reported for financial statement purposes
and tax laws and rates in effect for the years presented. Deferred federal in-
come taxes arise from timing differences between the recognition of income de-
termined for financial reporting purposes and income tax purposes. Such timing
differences are related principally to the deferral of policy acquisition costs,
the recognition of unearned premiums, and discounting the claims reserves for
tax purposes. Deferred taxes are also provided on unrealized gains and losses.
LOSS RESERVES
Reserves for loss and loss adjustment expenses reflect the Company's best esti-
mate of the liability for the ultimate cost of reported claims and incurred but
not reported (IBNR) claims as of the end of each period. The estimates are based
on past claim experience and consider current claim trends as well as social and
economic conditions. The Company's reserve for loss and loss adjustment expenses
were $38,527,467 as of June 30, 1996 compared with $38,584,084 as of December
31, 1995 and $32,297,897 as of June 30, 1995. This increase is a combination of
giving consideration for the increase in premium volume, increased retention on
all lines of coverages written and an increase in the IBNR reserves. Management
continues to closely monitor the reserve development trends and projections as
it attempts to stabilize the loss reserve development which has occurred in
recent years.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the Company's ability to meet obligations as they become
due. The obligations and cash outflow of the Company include claims settlements,
acquisition and administrative expenses, investment purchases and dividends to
shareholders. In addition to satisfying obligations and cash outflow through
premium collections, there is cash inflow obtained from interest and dividend
income, maturities and sales of investments. Because cash inflow from premiums
is received in advance of cash outflow required to settle claims, the Company
accumulates funds which it invests pending liquidity requirements. Therefore,
investments represent the majority (82.6%, 85.0% and 81.7% at each respective
period) of the Company's assets. Cash outflow can be unpredictable for two rea-
sons: first, a large portion of liabilities representing loss reserves have un-
certainty regarding settlement dates; and second, there is potential for losses
occurring either individually or in aggregate. As a result, the Company main-
tains adequate short-term investment programs necessary to ensure the availa-
bility of funds. The investment program is structured so that a forced sale li-
quidation of fixed maturities should not be necessary during the course of ordi-
nary business involvement and activities. The Company has no material capital
expenditure commitments.
12
<TABLE>
INSURANCE SUBSIDIARY FINANCIAL STATEMENTS
Statutory Basis as Reported to State Regulatory Authorities
June 30, 1996, December 31, 1995 and June 30, 1995
CAPITOL INDEMNITY CORPORATION June 30, December 31, June 30,
Balance Sheets 1996 1995 1995
<S> <C> <C> <C>
ASSETS
Cash and Invested Assets $141,499,123 $131,071,365 $108,376,128
Other Receivables 18,637,322 13,516,319 15,049,064
Total Assets $160,136,445 $144,587,684 $123,425,192
LIABILITIES
Reserve for Losses and Loss Expenses $ 37,977,786 $ 37,996,923 $ 31,480,633
Unearned Premiums 37,742,936 30,658,679 28,733,644
Other Payables 15,670,635 13,313,535 13,489,235
Total Liabilities 91,391,357 81,969,137 73,703,512
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 68,745,088 62,618,547 49,721,680
Total Liabilities and Capital $160,136,445 $144,587,684 $123,425,192
Statements of Income
Premiums Earned $ 35,818,986 $ 63,199,650 $ 30,136,014
Underwriting Deductions 29,510,697 56,261,059 26,239,790
Net Underwriting Gain 6,308,289 6,938,591 3,896,224
Investment Income Including Sales 4,290,217 9,036,612 3,398,599
Other Income (Expense) 47,788 118,746 103,803
Income Tax Expense 3,494,476 4,331,395 1,937,556
Net Income $ 7,151,818 $ 11,762,554 $ 5,461,070
CAPITOL SPECIALTY INSURANCE CORPORATION
Balance Sheets
ASSETS
Cash and Invested Assets $ 5,883,091 $ 5,821,375 $ 5,665,883
Other Receivables 109,416 94,597 81,136
Total Assets $ 5,992,507 $ 5,915,972 $ 5,737,019
LIABILITIES
Due to Brokers $ - $ - $ 114,512
Other Payables 309,443 8,878 7,478
Total Liabilities 309,443 8,878 121,990
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 5,683,064 5,907,094 5,615,029
Total Liabilities and Capital $ 5,992,507 $ 5,915,972 $ 5,737,019
Statements of Income
Premiums Earned $ 109 $ 1,084 $ 525
Underwriting Deductions 11,043 17,586 11,414
Net Underwriting (Loss) Gain (10,934) (16,502) (10,889)
Investment Income Including Sales 149,523 290,079 138,831
Income Tax Expense (1,049) 35,039 6,382
Net Income $ 139,638 $ 238,538 $ 121,560
</TABLE>
13
PART II
14
Other Disclosures
Item 1. Legal Proceedings
Reference is made to footnote number 7 "Contingent
Liabilities" on Page 9 of this report.
Item 2. Changes in Securities
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
Reference is made to the Notice of Annual Meeting of
Shareholders and Proxy Statement for the Annual
Meeting of Shareholders which was held April 29, 1996,
both of which are dated March 29, 1996 and previously
filed with the Securities and Exchange Commission
and are incorporated herein as an exhibit by
reference.
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
NONE
15
CAPITOL TRANSAMERICA CORPORATION
Subsidiaries
Capitol Indemnity Corporation
Capitol Specialty Insurance Corporation
Capitol Facilities Corporation
Board of Directors
Paul J. Breitnauer Michael J. Larson
Vice President and Treasurer President
Capitol Transamerica Corporation Bank One Madison
Sun Prairie, Wisconsin Madison, Wisconsin
George A. Fait Reinhart H. Postweiler
Chairman of the Board Retired-formerly with
and President Flad Affiliated Corp.
Capitol Transamerica Corporation Madison, Wisconsin
Madison, Wisconsin
Robert W. Goodwin Richard E. Tipple
Retired-formerly with Retired-formerly with
Dean Witter Reynolds, Inc. Univ. of Wisconsin
Clearwater, Florida Planning Department
Stoughton, Wisconsin
Officers
George A. Fait Virgiline M. Schulte
Chairman of the Board and President Secretary
Paul J. Breitnauer Jane F. Endres
Vice President and Treasurer Assistant Secretary
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the under-
signed thereunto duly authorized.
CAPITOL TRANSAMERICA CORPORATION
George A. Fait
Chairman of the Board and President
Paul J. Breitnauer
Vice President and Treasurer
Date: July 29, 1996
17
EXHIBIT I
CAPITOL TRANSAMERICA CORPORATION
FOR IMMEDIATE RELEASE Contact: Paul J. Breitnauer
July 29, 1996 Phone (608) 231-4450
NEWS RELEASE
SECOND QUARTER EARNINGS INCREASE 49.8%
Madison, Wisconsin, July 29, 1996- George A. Fait, Chairman, today announced
that second quarter earnings increased 49.8% over the comparable quarter of
1995. Consolidated net income for the quarter ended June 30, 1996 was $5.8
million or $.79 per share compared with $3.9 million or $.53 per share for the
same period in 1995. Second quarter earnings for 1996 included $.11 per share of
after-tax realized gains, whereas the second quarter of 1995 included $.08 per
share. Excluding realized gains, second quarter 1996 and 1995 net income was
$.68 and $.45 per share, respectively, a 51.1% increase.
Year to date earnings were $9.1 million or $1.23 per share compared with
$6.9 million or $.94 per share in 1995, a 31.5% increase. Six months income in
1996 included $875,000 or $.12 per share of after-tax realized gains while the
six months of 1995 included $574,000 or $.08 per share of after-tax realized
gains. Excluding realized gains, net income for the six months of 1996 was $1.11
per share compared with $.86 per share for the same period last year, a 29.6%
increase.
Gross premiums written for the second quarter rose sharply from $19.0
million in 1995 to $24.8 million for the same period in 1996, a $5.8 million or
30.2% increase. Net premiums earned for the second quarter increased from $16.3
million in 1995 to $18.7 million in 1996, a 14.3% increase.
Gross premiums written for the six months of 1996 were $43.7 million com-
pared with $33.9 million for the same period in 1995, a 28.7% increase. Net
premiums earned increased 18.9% for the six months from $30.1 million in 1995
to $35.8 million in 1996.
Total cash and invesed assets also increased significantly, growing from
$123.9 million at June 30, 1995 to $158.3 million at June 30, 1996, and increase
of 27.8%. Net investment income for the first six months of 1996 was $3.5
million compared with $3.1 million for the same period in 1995, a 12.4% in-
crease. In addition, the market value in excess of cost of the Company's invest-
ment portfolio, net of deferred taxes, is currently $13.0 million.
Shareholders' equity has increased 22.7% since June 30, 1995, from $81.6
million or $11.07 per share to $100.1 million or $13.56 per share at June 30,
1996. Dividends paid in the first six months totaled $2.2 million or $.30 per
share.
Fait stated that "the combined net loss, loss expense and general expense
ratio for the first six months of 1996 was 76.1% compared with 83.6% for like
period in 1995. The Company's combined ratio continues to dramatically out-
perform the industry average of 103.8% for the first quarter of 1996 and 107.3%
for the year of 1995. The ability to maintain a favorable combined ratio while
increasing premium volume indicates that we have adhered to our basic philosophy
of generating underwriting profit and not relying on investment income to re-
flect positive earnings. Increasing premium volume with business that is con-
sistent with this philosophy, despite severe price competition, presents a
formidable challenge".
The marketing strategy of geographic expansion and new product development
continues to be very successful in 1996. The Company recently became licensed in
its thirty-fifth state, and has applications for licenses pending in three addi-
tional states. Management is confident that this approach will enable the
Company to attain its production goals for 1996.
Capitol Transamerica Corporation is an insurance holding company operating
a regional insurance business writing specialty lines of commercial property
and casualty policies as well as fidelity and surety coverages through its sub-
sidiary insurance companies Capitol Indemnity Corporation and Capitol Specialty
Insurance Corporation. A third subsidiary, Capitol Facilities Corporation, pro-
vides premium financing for the insurance companies. The Capitol Transamerica
Group continues to be rated A+ (Superior) by A.M. Best Company, Inc., an inde-
pendent organization that analyzes the insurance industry.
Capitol Transamerica Corporation, with 7.4 million shares outstanding, is
traded on the National Over-the-Counter Stock Market under the symbol CATA.
FINANCIAL HIGHLIGHTS FOLLOW
(Adjusted for the December 28, 1995 ten percent stock dividend)
19
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
(in thousands, except per share)
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Six months ended June 30, Three months ended June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUES
Gross premiums written $ 43,653 $ 33,930 $ 24,776 $ 19,027
Net premiums written 42,903 32,698 24,778 18,352
Net premiums earned $ 35,819 $ 30,132 $ 18,655 $ 16,317
EXPENSES
Claims and claim expenses 15,622 15,328 7,046 8,398
Other underwriting expenses 12,260 9,428 6,301 4,971
Total Losses and Expenses Incurred 27,882 24,756 13,347 13,369
Underwriting income 7,937 5,376 5,308 2,948
Investment income 3,497 3,112 1,787 1,569
Realized investment gains 1,325 869 1,209 849
Other income 51 127 20 29
Income Before Income Tax 12,810 9,484 8,324 5,395
Income tax expense 3,728 2,578 2,522 1,522
NET INCOME $ 9,082 $ 6,906 $ 5,802 $ 3,873
EARNINGS PER SHARE $ 1.23 $ 0.94 $ 0.79 $ 0.53
<CAPTION>
COMPARATIVE FINANCIAL HIGHLIGHTS- Six Months Ended June 30,
1996 1995 1994 1993 1992
Per Share Information
<S> <C> <C> <C> <C> <C>
Income per share $ 1.23 $ 0.94 $ 0.71 $ 0.63 $ 0.74
Consolidated net income $ 9,082 $ 6,906 $ 5,192 $ 4,559 $ 5,333
Weighted average number
of shares outstanding 7,377 7,356 7,320 7,276 7,207
Book value per share $ 13.56 $ 11.07 $ 9.02 $ 7.99 $ 7.15
Shareholders' investment $ 100,107 $ 81,595 $ 66,250 $ 58,250 $ 51,598
Dividends paid $ 2,222 $ 1,205 $ 1,869 $ 1,655 $ 552
Shares outstanding 7,384 7,370 7,343 7,290 7,215
Company Statistics:
Gross premiums written $ 43,653 $ 33,930 $ 29,446 $ 23,148 $ 17,876
Net investment income $ 3,497 $ 3,112 $ 2,536 $ 2,439 $ 2,315
Invested assets $ 157,949 $ 123,889 $ 94,417 $ 83,422 $ 70,032
Total assets $ 191,135 $ 151,564 $ 118,197 $ 103,595 $ 86,716
Insurance Operating Ratios,
Statutory Basis:
Loss and loss adjustment
expenses: 43.6% 51.1% 47.7% 46.3% 38.3%
Underwriting expenses 32.5% 32.5% 32.3% 32.6% 33.2%
Combined ratios 76.1% 83.6% 80.0% 78.9% 71.5%
20
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
BALANCE SHEETS
(in thousands, except per share)
<CAPTION>
June 30, December 31, June 30,
1996 1995 1995
ASSETS
<S> <C> <C> <C>
Cash and investments $ 158,308 $ 149,819 $ 123,919
Receivables 19,553 15,129 16,691
Other assets 13,274 10,683 10,954
TOTAL ASSETS $ 191,135 $ 175,631 $ 151,564
LIABILITIES
Claims and claim expenses $ 38,528 $ 38,584 $ 32,298
Unearned premiums 38,308 31,556 29,529
Other liabilities 14,192 12,837 8,141
TOTAL LIABILITIES $ 91,028 $ 82,977 $ 69,968
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
15,000,000 shares, issued 7,594,085,
7,588,605 and 6,890,928 respectively $ 7,594 $ 7,589 $ 6,891
Paid-in surplus 21,005 20,949 7,980
Unrealized appreciation on securities carried
at fair value, net of deferred taxes 13,046 13,260 7,189
Retained earnings 58,784 51,178 59,858
Less treasury stock, 210, 210, and 191 share,
respectively, at cost (322) (322) (322)
TOTAL SHAREHOLDERS' EQUITY 100,107 92,654 81,596
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $191,135 $175,661 $151,564
SHAREHOLDERS' EQUITY PER SHARE $ 13.56 $ 12.55 $ 11.07
Increase in Shareholders' Equity
June 30, 1995 to June 30, 1996 22.7%
June 30, 1994 to June 30, 1995 23.2%
21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 73,891,557
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 76,650,201
<MORTGAGE> 0
<REAL-ESTATE> 1,435,463
<TOTAL-INVEST> 151,977,221
<CASH> 6,330,715
<RECOVER-REINSURE> 308,154
<DEFERRED-ACQUISITION> 11,036,068
<TOTAL-ASSETS> 191,134,530
<POLICY-LOSSES> 38,527,467
<UNEARNED-PREMIUMS> 38,308,476
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 7,594,085
0
0
<OTHER-SE> 92,512,571
<TOTAL-LIABILITY-AND-EQUITY> 191,134,530
35,819,095
<INVESTMENT-INCOME> 3,496,671
<INVESTMENT-GAINS> 1,325,457
<OTHER-INCOME> 50,453
<BENEFITS> 15,622,134
<UNDERWRITING-AMORTIZATION> (1,807,200)
<UNDERWRITING-OTHER> 13,509,160
<INCOME-PRETAX> 12,809,983
<INCOME-TAX> 3,727,604
<INCOME-CONTINUING> 9,082,379
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,082,379
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.23
<RESERVE-OPEN> 38,584,084
<PROVISION-CURRENT> 9,360,976
<PROVISION-PRIOR> 29,166,491
<PAYMENTS-CURRENT> 6,364,890
<PAYMENTS-PRIOR> 9,366,662
<RESERVE-CLOSE> 38,527,467
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
