SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 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 (23) and low price (22 1/2), the ag-
gregate market value of voting stock held by non-affiliates of the registrant
as of September 30, 1996 was approximately $168,029,407.
Indicate the number of shares of each of the issuer's class of common stock, as
of the latest practicable date:
At September 30, 1996
Common Stock, $1.00 Par Value;
Issued: 7,595,739
Outstanding: 7,385,908
Total Pages: 21
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Part I
Financial Information Page
Consolidated Financial Statements 3 - 7
Notes to Consolidated Financial Statements 8 - 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10 - 12
Condensed Statutory Financial
Statements of Insurance Subsidiaries 13
Part II
Other Information
Other Disclosures 15
Officers & Directors 16
Signatures 17
Press Release 18-21
2
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31, September 30,
1996 1995 1995
<S> <C> <C> <C>
ASSETS
Investments:
Available-for-sale investment securities, at fair value
U.S. Government bonds (amortized cost $583,001, $591,928
and $597,235, respectively) $ 585,840 $ 601,571 $ 601,452
State, municipal and political subdivision bonds (amortized
cost $69,090,451, $70,020,468 and $65,046,918, respectively) 73,968,241 77,122,077 70,275,297
Corporate bonds and notes (amortized cost $885,435,
$880,859 and $879,373, respectively) 950,889 946,193 926,996
Equity securities:
Common stock (cost $59,712,327, $50,412,460 and
$47,736,672, respectively) 81,044,096 63,141,401 58,163,813
Nonredeemable preferred stock (cost $5,575,266, $3,868,836
and $3,717,586, respectively) 5,934,273 4,054,200 3,812,762
Investment real estate, at cost, net of depreciation 3,415,803 1,435,486 1,469,887
Short-term investments, at cost which
approximates fair value 5,014,824 1,915,795 2,517,326
Total Investments 170,913,966 149,216,723 137,767,533
Cash 197,119 602,775 295,501
Accrued investment income 1,633,703 1,718,254 1,576,550
Receivables from agents, insureds and others, less allowance for
doubtful accounts of $365,000, $320,000 and $310,000, respectively 18,534,193 11,874,125 12,736,500
Balances due from reinsurers 275,675 630,448 619,071
Funds held by ceding reinsurers 78,385 77,117 77,117
Reinsurance recoverable on unpaid losses 37,848 45,321 262,211
Reinsurance recoverable on paid losses 72,072 568,379 195,014
Deferred insurance acquisition costs 12,141,461 9,228,868 9,018,701
Prepaid reinsurance premiums 624,813 897,049 877,113
Due from securities brokers 1,117,147 215,165 -
Income taxes receivable - 110,091 -
Other assets 1,803,862 446,263 477,435
Total Assets $207,430,244 $175,630,578 $163,902,746
</TABLE>
3
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31, September 30,
1996 1995 1995
<S> <C> <C> <C>
LIABILITIES
Policy liabilities and accruals:
Reserve for losses $ 25,490,979 $ 25,679,644 $ 24,817,806
Reserve for loss adjustment expenses 13,318,749 12,904,440 10,603,291
Unearned premiums 41,328,110 31,555,728 30,747,328
Total Policy Liabilities and Accruals 80,137,838 70,139,812 66,168,425
Accounts payable 4,925,124 4,362,308 3,617,179
Dividends payable - 745,009 -
Due to securities brokers 561,922 370,123 350,450
Balances due to reinsurers 2,033,123 1,175,565 1,631,780
Accrued premium taxes 407,440 382,544 255,518
Income taxes payable 1,274,214 - 349,149
Deferred income taxes 8,215,514 5,801,337 4,487,389
Total Other Liabilities 17,417,337 12,836,886 10,691,465
Total Liabilities 97,555,175 82,976,698 76,859,890
SHAREHOLDERS' INVESTMENT
Common stock, $1.00 par value, authorized 15,000,000 shares,
issued 7,595,739, 6,899,060 and 6,894,467, respectively 7,595,739 6,899,060 6,894,467
Common stock distributable, 689,545 shares at $1.00 par value - 689,545 -
Paid-in surplus 21,017,462 20,949,100 7,996,027
Net unrealized appreciation (depreciation) on investment securities
carried at fair value, net of deferred taxes of $9,056,532, $6,830,903
and $5,372,862, respectively 17,580,326 13,259,988 10,429,673
Retained earnings 64,003,249 51,177,894 62,044,396
Shareholders' investment before treasury stock 110,196,776 92,975,587 87,364,563
Treasury stock, 209,831, 209,831 and 190,756 shares,
respectively, at cost (321,707) (321,707) (321,707)
Total Shareholders' Investment 109,875,069 92,653,880 87,042,856
Total Liabilities and Shareholders' Investment $207,430,244 $175,630,578 $163,902,746
Book Value Per Share $ 14.88 $ 12.55 $ 11.80
Shares Outstanding 7,385,908 7,378,774 7,374,082
</TABLE>
4
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
For the Nine Months For the Three Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUES
Premiums earned $ 56,098,839 $ 46,578,365 $ 20,279,744 $ 16,446,484
Net investment income 5,260,747 4,781,290 1,764,076 1,669,199
Realized investment gains 2,590,704 868,309 1,265,247 (743)
Other revenues 81,992 143,315 31,539 16,107
Total Revenues 64,032,282 52,371,279 23,340,606 18,131,047
LOSSES AND EXPENSES INCURRED
Losses incurred 18,543,154 17,714,251 5,492,969 6,888,189
Loss adjustment expenses incurred 5,208,037 5,868,831 2,636,088 1,366,565
Underwriting, acquisition and
insurance expenses 21,372,398 15,950,007 7,863,238 5,646,838
(Increase) Decrease in deferred insurance
acquisition costs (2,912,593) (1,303,312) (1,105,393) 61,874
Other expenses 674,438 850,102 116,839 360,668
Total Losses and Expenses Incurred 42,885,434 39,079,879 15,003,741 14,324,134
Income from operations before
income taxes 21,146,848 13,291,400 8,336,865 3,806,913
Income tax expense (benefit)
Current 6,908,072 3,541,165 2,760,604 1,273,116
Deferred (801,736) (12,555) (381,872) (323,050)
6,106,336 3,528,610 2,378,732 950,066
Net Income $ 15,040,512 $ 9,762,790 $ 5,958,133 $ 2,856,847
INCOME PER SHARE $ 2.04 $ 1.33 $ 0.81 $ 0.39
Weighted Average Number of Shares Outstanding 7,380,570 7,360,894 7,380,570 7,360,894
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 - - - - 15,040,512 -
Unrealized depreciation on available-for
sale securities, net of deferred taxes - - - 4,320,338) - -
Stock options exercised 7,134 - 68,374 - - -
Stock dividend issued 689,545 (689,545) - - - -
Cash dividend declared - - - - (2,215,157) -
Balance, September 30, 1996 $ 7,595,739 $ - $21,017,474 $17,580,326 $64,003,249 $ (321,707)
6
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
September 30, December 31, September 30,
1996 1995 1995
Cash flows provided by operating activities:
<S> <C> <C> <C>
Net Income $ 15,040,512 $ 13,930,406 $ 6,905,943
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 567,894 423,119 172,905
Realized investment gains (2,590,704) (3,587,323) (869,052)
Change in:
Deferred insurance acquisition costs (2,912,593) (1,513,479) (1,365,186)
Unearned premiums 9,772,382 4,761,479 2,734,719
Allowance for doubtful accounts receivable from agents 45,000 65,785 30,000
Accrued investment income 84,551 (352,131) (83,600)
Receivables from agents, insureds and others (6,705,068) (2,595,686) (3,992,509)
Balances due to/from reinsurers 1,212,331 (154,893) 186,264
Reinsurance recoverable on paid and unpaid losses 503,780 (547,078) (338,932)
Funds held by ceding reinsurers (1,268) 60,305 60,305
Income taxes payable 1,384,305 371,620 880,410
Deferred income taxes 188,548 (156,647) 310,495
Due to/from securities brokers (710,183) (145,042) (1,188,610)
Prepaid reinsurance premiums 272,236 (270,011) (168,286)
Other assets (826,310) 294,732 (416,726)
Reserve for losses and loss adjustment expenses 225,644 11,108,761 4,822,574
Accounts payable 562,815 448,636 (860,197)
Accrued premium taxes 24,896 112,822 (171,199)
Net cash provided by operating activities 16,138,768 22,255,375 6,649,318
Cash flows provided by (used for) investing activities:
Proceeds from sales of available-for-sale investments 11,046,337 21,046,919 11,458,982
Purchases of available-for-sale investments (29,103,232) (47,289,410) (22,652,896)
Maturities of available-for-sale investments 5,469,710 6,447,108 4,827,164
Purchase of depreciable assets (1,072,571) (683,115) (370,725)
Net cash used for investing activities (13,659,756) (20,478,498) (6,737,475)
Cash flows provided by (used for) financing activities:
Cash dividends paid (2,960,166) (2,546,264) (1,205,310)
Stock options exercised 75,496 109,924 60,960
Net proceeds from sale of treasury stock 0 8,918 8,918
Net cash used for financing activities (2,884,670) (2,427,422) (1,135,432)
Net decrease in cash (405,658) (650,545) (1,223,589)
Cash, beginning of period 602,775 1,253,320 1,253,320
Cash, end of period $ 197,117 $ 602,775 $ 29,731
Cash paid during the year for:
Income taxes $ 4,175,000 $ 4,497,508 $ 1,395,000
Interest - - -
</TABLE>
7
CAPITOL TRANSAMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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.
(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 17,134 options exercised during the nine months ended
September 30, 1996 and there were 16,871 options exercised during the
nine months ended September 30, 1995. For further information regarding
stock options, refer to Note 6 of Notes to Consolidated Financial State
-ments included in the Company's 1995 annual report on form 10-K.
(5) Dividends
1996
On September 9, 1996 a cash dividend of $.10 per share was declared to
shareholders of record September 11 and paid September 26, in the
amount of $738,574.
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 in the amount
of 689,545 shares.
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.
8
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.
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 $158,486, $126,983 and $116,486 as of September 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 nine months ended September 30, 1996 gross premiums written increased
29.3% over the same period in 1995. The Company's goal for 1996 is a 19% to 21%
increase in premiums written. Our plan to reach this goal includes geographic
expansion and new product development. Capitol Indemnity Corporation, the Com-
pany'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 $56,098,839, $63,865,500 and
$46,578,365 for the respective periods; and net unearned premiums were
$41,328,110, $31,555,728 and $30,747,328 at each respective period.
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1996 1995 1995
<S> <C> <C> <C>
Gross Premiums Written $67,444,696 $70,878,492 $52,173,363
Reinsurance Ceded 1,301,239 2,521,524 1,891,994
Net Premiums Written $66,143,457 $68,356,968 $50,281,369
Net Premiums Earned $56,098,839 $63,865,500 $46,578,365
Net Unearned Premium Reserve $41,328,110 $31,555,728 $30,747,328
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>
September 30, December 31, September 30,
Insurance Operating Ratios (Statutory Basis): 1996 1995 1995
<S> <C> <C> <C>
Loss and Loss Adjustment Expenses 42.6% 53.2% 50.5%
Underwriting Expenses 32.7% 32.8% 32.9%
Combined Ratios 75.3% 86.0% 83.4%
The Company's combined loss and expense ratios continues to dramatically outperform the industry average
of 105.4% 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>
September 30, December 31, September 30,
Investments: 1996 1995 1995
<S> <C> <C> <C>
Invested Assets $ 170,913,966 $ 149,216,723 $ 137,767,533
Net Investment Income 5,260,747 6,635,123 4,781,290
Percent of Return to
Average Carrying Value 7.8% 5.7% 5.6%
Realized Gains 2,590,704 3,587,323 868,309
Change in Unrealized Gains $ 6,545,967 $ 21,085,956 $ 16,797,600
</TABLE>
The $6,545,967 increase in unrealized gains for the nine months of 1996 was com-
posed of a $8,776,473 increase in market value over cost of the Company's equi-
ty securities and a $2,230,506 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 nine months. The Company continued to move more of its
investment portfolio into equity securities in 1996. Future investment decisions
will be determined based on the economy and the stock and bond markets. Net
investment income for the nine months of 1996 was up 10% over the same period
1995, and the overall rate of return on our investment portfolio also increased
to 7.8% from 5.6% at September 30, 1995. This increase is due in large part to
the sizable increase in realized capital gains in the first nine months of 1996
compared with the same time period in 1995. Net unrealized gains were 17,580,326
$13,259,988 and $10,429,673 as of September 30, 1996, December 31, 1995 and
September 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 $38,809,728 as of Septmeber 30, 1996 compared with $38,584,084 as of
December 31, 1995 and $35,421,097 as of September 30, 1995. This increase is a
combination of giving consideration for the increase in premium volume, in-
creased 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 (82.4%, 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
September 30, 1996, December 31, 1995 and September 30, 1995
CAPITOL INDEMNITY CORPORATION September 30, December 31, September 30,
Balance Sheets 1996 1995 1995
<S> <C> <C> <C>
ASSETS
Cash and Invested Assets $153,794,510 $131,071,365 $121,547,899
Other Receivables 20,751,409 13,516,319 13,278,253
Total Assets $174,545,919 $144,587,684 $134,826,152
LIABILITIES
Reserve for Losses and Loss Expenses $ 38,289,874 $ 37,996,923 $ 34,632,248
Unearned Premiums 40,703,297 30,658,679 29,870,215
Other Payables 16,113,216 13,313,535 13,657,686
Total Liabilities 95,106,387 81,969,137 78,160,149
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 79,439,532 62,618,547 56,666,003
Total Liabilities and Capital $174,545,919 $144,587,684 $134,826,152
Statements of Income
Premiums Earned $ 56,098,730 $ 63,199,650 $ 46,241,603
Underwriting Deductions 45,935,782 56,261,059 39,768,163
Net Underwriting Gain 10,162,948 6,938,591 6,473,440
Investment Income Including Sales 7,065,139 9,036,612 4,771,408
Other Income (Expense) 77,940 118,746 118,208
Income Tax Expense 5,428,085 4,331,395 3,430,265
Net Income $ 11,877,942 $ 11,762,554 $ 7,932,791
CAPITOL SPECIALTY INSURANCE CORPORATION
Balance Sheets
ASSETS
Cash and Invested Assets $ 6,209,169 $ 5,821,375 $ 5,614,880
Other Receivables 90,116 94,597 83,861
Total Assets $ 6,299,285 $ 5,915,972 $ 5,698,741
LIABILITIES
Payable to Parent $ 300,000 $ - $ -
Other Payables 20,049 8,878 9,155
Total Liabilities 320,049 8,878 9,155
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 5,979,236 5,907,094 5,689,586
Total Liabilities and Capital $ 6,299,285 $ 5,915,972 $ 5,698,741
Statements of Income
Premiums Earned $ 109 $ 1,084 $ 849
Underwriting Deductions 15,397 17,586 14,682
Net Underwriting Loss (15,288) (16,502) (13,833)
Investment Income Including Sales 227,503 290,079 210,607
Income Tax (Benefit) Expense (757) 35,039 7,891
Net Income $ 212,972 $ 238,538 $ 188,883
</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: October 18, 1996
17
EXHIBIT I
CAPITOL TRANSAMERICA CORPORATION
FOR IMMEDIATE RELEASE Contact: Paul J. Breitnauer
October 18, 1996 Phone (608) 231-4450
NEWS RELEASE
THIRD QUARTER EARNINGS INCREASE 108.6%
Madison, Wisconsin, October 18, 1996- George A. Fait, Chairman, today announced
that third quarter earnings were more than double the comparable quarter of
1995. Consolidated net income for the quarter ended September 30, 1996 was $6.0
million or $.81 per share compared with $2.9 million or $.39 per share for the
same period in 1995. Third quarter earnings for 1996 included $.11 per share of
after-tax realized gains, whereas there no realized gains or losses in the third
quarter of 1995. Excluding net realized gains, third quarter 1996 and 1995 net
income was $.69 and $.39 per share, respectively, a 79.3% increase.
Year to date earnings were $15.0 million or $2.04 per share compared with
$9.8 million or $1.33 per share in 1995, a 54.1% increase. Nine months income in
1996 included $1.7 million or $.23 per share of after-tax realized gains while
the nine months of 1995 included $573,000 or $.08 per share of after-tax realiz-
ed gains. Excluding realized gains, net income for the nine months of 1996 was
$1.81 per share compared with $1.25 per share for the same period last year, a
45.1% increase.
Gross premiums written for the third quarter again rose sharply from $18.2
million in 1995 to $23.8 million for the same period in 1996, a $5.5 million or
30.4% increase. Net premiums earned for the third quarter increased from $16.5
million in 1995 to $20.3 million in 1996, a 23.3% increase.
Year to date gross premiums written for 1996 were $67.4 million compared
with $52.2 million for the same period in 1995, a 29.3% increase. Net premiums
earned increased 20.4% for the nine months from $46.6 million in 1995 to $56.1
million in 1996.
Total cash and invesed assets increased significantly, growing from $138.1
million at September 30, 1995 to $171.1 million at September 30, 1996, an in-
crease of 23.9%. Net investment income for the first nine months of 1996 was
$5.3 million compared with $4.8 million for the same period in 1995, a 10.0% in-
crease. The market value in excess of cost of the Company's investment portfo-
lio, net of deferred taxes, has increased $17.6 million.
Shareholders' equity has increased 26.2% since September 30, 1995, from
$87.0 million or $11.80 per share to $109.9 million or $14.88 per share at
September 30, 1996. Dividends paid in the first nine months totaled $3.0 million
or $.40 per share.
Fait stated that "the combined net loss, loss expense and general expense
ratio for the first nine months of 1996 was 75.3% compared with 83.4% for like
period in 1995. The Company's combined ratio continues to dramatically outper-
form the industry average of 105.4% for the first six months of 1996 and 107.3%
for the year of 1995. The Company's strong performance and ability to maintain
a favorable combined ratio while increasing premium volume indicates adherence
to our philosophy of generating underwriting profits and not relying on invest-
ment income to reflect positive earnings. Increasing premium volume with busi-
ness that is consistent with this philosophy, despite severe price competition,
presents a formidable and ongoing challenge".
The marketing strategy of geographic expansion and new product development
continues to be very successful. The Company is licensed in thirty-five states,
and has applications for licenses pending in three additional states. Management
is confident that this growth potential will enable the Company to supass pro-
duction goals for 1996 and provide a foundation for increased premium writings
in 1997.
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 is rated A+ (Superior) by A.M. Best Company, Inc., an independent organi-
zation 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>
Nine months ended September 30, Three months ended September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUES
Gross premiums written $ 67,444 $ 52,173 $ 23,791 $ 18,243
Net premiums written 66,143 50,281 23,240 17,583
Net premiums earned $ 56,099 $ 46,578 $ 20,280 $ 16,446
EXPENSES
Claims and claim expenses 23,751 23,583 8,129 8,255
Other underwriting expenses 19,134 15,497 6,875 6,069
Total Losses and Expenses Incurred 42,885 39,080 15,004 14,324
Underwriting income 13,214 7,498 5,276 2,122
Investment income 5,261 4,781 1,764 1,669
Realized investment gains 2,590 868 1,265 (1)
Other income 82 144 31 17
Income Before Income Tax 21,147 13,291 8,336 3,807
Income tax expense 6,106 3,528 2,378 950
NET INCOME $ 15,041 $ 9,763 $ 5,958 $ 2,857
EARNINGS PER SHARE $ 2.04 $ 1.33 $ 0.81 $ 0.39
<CAPTION>
COMPARATIVE FINANCIAL HIGHLIGHTS- Nine Months Ended September 30,
1996 1995 1994 1993 1992
Per Share Information
<S> <C> <C> <C> <C> <C>
Income per share $ 2.04 $ 1.33 $ 1.06 $ 0.92 $ 0.91
Consolidated net income $ 15,041 $ 9,763 $ 7,794 $ 6,655 $ 6,555
Weighted average number
of shares outstanding 7,381 7,361 7,333 7,283 7,213
Book value per share $ 14.88 $ 11.80 $ 9.27 $ 8.25 $ 7.27
Shareholders' investment $ 109,875 $ 87,043 $ 68,148 $ 60,293 $ 52,578
Dividends paid $ 2,979 $ 1,871 $ 2,404 $ 2,487 $ 1,373
Shares outstanding 7,386 7,374 7,350 7,313 7,230
Company Statistics:
Gross premiums written $ 67,444 $ 52,173 $ 44,913 $ 36,935 $ 28,872
Net investment income $ 5,261 $ 4,781 $ 3,889 $ 3,673 $ 3,544
Invested assets $ 170,914 $ 137,768 $ 101,051 $ 86,915 $ 71,671
Total assets $ 207,430 $ 163,903 $ 124,806 $ 109,512 $ 92,496
Insurance Operating Ratios,
Statutory Basis:
Loss and loss adjustment
expenses: 42.6% 50.5% 47.9% 49.6% 46.8%
Underwriting expenses 32.7% 32.9% 31.9% 32.6% 35.0%
Combined ratios 75.3% 83.4% 79.8% 82.2% 81.8%
20
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
BALANCE SHEETS
(in thousands, except per share)
<CAPTION>
September 30, December 31, September 30,
1996 1995 1995
ASSETS
<S> <C> <C> <C>
Cash and investments $ 171,111 $ 149,819 $ 138,063
Receivables 21,749 15,129 15,467
Other assets 14,570 10,683 10,373
TOTAL ASSETS $ 207,430 $ 175,631 $ 163,903
LIABILITIES
Claims and claim expenses $ 38,810 $ 38,584 $ 35,421
Unearned premiums 41,328 31,556 30,747
Other liabilities 17,417 12,837 10,692
TOTAL LIABILITIES $ 97,555 $ 82,977 $ 76,860
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
15,000,000 shares, issued 7,595,739,
7,588,605 and 6,894,467 respectively $ 7,596 $ 7,589 $ 6,895
Paid-in surplus 21,018 20,949 7,996
Unrealized appreciation on securities carried
at fair value, net of deferred taxes 17,580 13,260 10,430
Retained earnings 64,003 51,178 62,044
Less treasury stock, 209,831, 209,831 and
190,756 shares, respectively, at cost (322) (322) (322)
TOTAL SHAREHOLDERS' EQUITY 109,875 92,654 87,043
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $207,430 $175,631 $163,903
SHAREHOLDERS' EQUITY PER SHARE $ 14.88 $ 12.55 $ 11.80
Increase in Shareholders' Equity
September 30, 1995 to September 30, 1996 26.2%
December 31, 1994 to December 31, 1995 36.3%
September 30, 1994 to September 30, 1995 27.7%
21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 75,504,970
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 86,978,369
<MORTGAGE> 0
<REAL-ESTATE> 3,415,803
<TOTAL-INVEST> 165,899,142
<CASH> 5,211,943
<RECOVER-REINSURE> 275,675
<DEFERRED-ACQUISITION> 12,141,461
<TOTAL-ASSETS> 207,430,244
<POLICY-LOSSES> 38,809,728
<UNEARNED-PREMIUMS> 41,328,110
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 7,595,739
0
0
<OTHER-SE> 102,280,030
<TOTAL-LIABILITY-AND-EQUITY> 207,430,244
56,098,839
<INVESTMENT-INCOME> 5,260,704
<INVESTMENT-GAINS> 2,590,704
<OTHER-INCOME> 81,992
<BENEFITS> 23,751,191
<UNDERWRITING-AMORTIZATION> (2,912,593)
<UNDERWRITING-OTHER> 21,372,398
<INCOME-PRETAX> 21,146,848
<INCOME-TAX> 6,106,336
<INCOME-CONTINUING> 15,040,512
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,040,512
<EPS-PRIMARY> 2.04
<EPS-DILUTED> 2.04
<RESERVE-OPEN> 38,584,084
<PROVISION-CURRENT> 11,647,654
<PROVISION-PRIOR> 27,162,074
<PAYMENTS-CURRENT> 11,132,736
<PAYMENTS-PRIOR> 11,728,274
<RESERVE-CLOSE> 38,809,728
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
