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, 1997 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 (27 1/2) and low price (26 1/2), the
aggregate market value of voting stock held by non-affiliates of the
registrant as of June 30, 1997 was approximately $301,195,854.
Indicate the number of shares of each of the issuer's class of common stock, as
of the latest practicable date:
At June 30, 1997
Common Stock, $1.00 Par Value;
Issued: 11,471,850
Outstanding: 11,155,402
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 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,
1997 1996 1996
<S> <C> <C> <C>
ASSETS
Investments:
Available-for-sale investment securities, at fair value
U.S. Government bonds (amortized cost $573,240, $578,852
and $587,678, respectively) $ 577,233 $ 583,395 $ 592,847
State, municipal and political subdivision bonds (amortized
cost $67,302,035, $75,906,193 and $67,992,044, respectively) 71,890,710 80,590,881 72,522,521
Corporate bonds and notes (amortized cost $1,126,919,
$1,321,999 and $883,890, respectively) 1,213,451 1,392,449 776,189
Equity securities:
Common stock (cost $80,917,488, $59,099,459 and
$55,868,965, respectively) 119,749,118 86,569,214 70,722,540
Nonredeemable preferred stock (cost $5,866,216, $5,346,938
and $5,442,776, respectively) 6,780,177 5,881,180 5,927,661
Investment real estate, at cost, net of depreciation 7,191,665 6,721,343 1,435,463
Short-term investments, at cost which
approximates fair value 999,745 3,063,384 5,971,861
Total Investments 208,402,099 184,801,846 157,949,082
Cash 545,506 364,994 358,854
Accrued investment income 1,668,678 1,684,940 1,652,373
Receivables from agents, insureds and others, less allowance for
doubtful accounts of $410,000, $380,000 and $350,000, respectively 22,769,318 18,712,387 17,375,980
Balances due from reinsurers 144,800 1,033,058 445,610
Funds held by ceding reinsurers - 44,791 78,385
Deferred insurance acquisition costs 13,414,263 12,978,314 11,036,068
Prepaid reinsurance premiums 619,301 704,148 565,540
Due from securities brokers - 6,347,754 -
Income taxes receivable 9,011 - -
Other assets 1,611,023 2,213,222 1,672,638
Total Assets $249,183,999 $228,885,454 $191,134,530
</TABLE>
3
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31, June 30,
1997 1996 1996
(Restated)
<S> <C> <C> <C>
LIABILITIES
Policy liabilities and accruals:
Reserve for losses $ 31,648,444 $ 29,811,723 $ 27,375,993
Reserve for loss adjustment expenses 18,837,286 17,890,640 13,651,474
Unearned premiums 44,670,377 43,258,833 38,308,476
Total Policy Liabilities and Accruals 95,156,107 90,961,196 79,335,943
Accounts payable 7,390,078 6,612,383 3,979,581
Dividends payable - 4,526 -
Due to securities brokers - 474,281 910,282
Balances due to reinsurers 1,699,018 1,776,524 1,748,027
Accrued premium taxes 160,511 562,573 251,885
Income taxes payable - 1,870,252 566,558
Deferred income taxes 14,195,451 10,041,836 5,885,598
Total Other Liabilities 23,445,058 21,342,375 13,341,931
Total Liabilities 118,601,165 112,303,571 92,677,874
SHAREHOLDERS' INVESTMENT
Common stock, $1.00 par value, authorized 15,000,000 shares,
issued 11,471,850, 7,612,711 and 7,594,085, respectively 11,471,850 7,612,711 7,594,085
Common stock distributable, 3,806,355 shares at $1.00 par value - 3,806,355 -
Paid-in surplus 21,503,620 21,114,644 21,004,764
Net unrealized appreciation on investment securities carried at
fair value, net of deferred taxes of $15,104,429, $11,139,649
and $6,720,579, respectively 29,320,362 21,624,025 13,045,826
Retained earnings 68,640,262 62,761,654 57,133,688
Shareholders' investment before treasury stock 130,936,094 116,919,389 98,778,363
Treasury stock, 316,448, 315,769 and 209,831 shares,
respectively, at cost (353,260) (337,506) (321,707)
Total Shareholders' Investment 130,582,834 116,581,883 98,456,656
Total Liabilities and Shareholders' Investment $249,183,999 $228,885,454 $191,134,530
Book Value Per Share $ 11.71 $ 10.50 $ 8.89
Shares Outstanding 11,155,402 11,103,297 11,076,381
</TABLE>
4
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Six Months For the Three Months
<CAPTION> Ended June 30, Ended June 30,
1997 1996 1997 1996
(Restated) (Restated)
<S> <C> <C> <C> <C>
REVENUES
Premiums earned $ 44,911,245 $ 35,819,095 $ 24,550,775 $ 18,655,521
Net investment income 4,119,867 3,496,671 1,972,565 1,787,016
Realized investment gains 379,060 1,325,457 33,366 1,209,198
Other revenues 36,352 50,453 29,625 18,704
Total Revenues 44,446,524 40,691,676 26,586,331 21,670,439
LOSSES INCURRED & EXPENSES
Losses incurred 17,347,375 14,300,185 9,601,564 7,371,104
Loss adjustment expenses incurred 4,430,344 3,821,949 2,287,747 2,175,389
Underwriting, acquisition and
insurance expenses 15,465,869 13,509,160 8,418,457 7,472,757
Increase in deferred insurance
acquisition costs (435,949) (1,807,200) (612,235) (1,417,393)
Other expenses 644,785 557,599 321,040 244,678
Total Losses and Expenses Incurred 37,452,424 30,381,693 20,016,573 15,846,535
Income from operations before
income taxes 11,994,100 10,309,983 6,569,758 5,823,904
Income tax expense (benefit)
Current 3,250,723 3,297,468 1,671,054 2,127,900
Deferred 188,835 (419,864) 331,499 (456,413)
3,439,558 2,877,604 2,002,553 1,671,487
Net Income $ 8,554,542 $ 7,432,379 $ 4,567,205 $ 4,152,417
INCOME PER SHARE $ 0.77 $ 0.67 $ 0.41 $ 0.38
Weighted Average Number of Shares Outstanding 11,110,549 11,065,944 11,110,549 11,065,944
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, 1995 $ 6,877,596 $ - $ 7,931,671 $ (656,743) $54,157,275 $ (330,625)
Net income - - - - 13,930,406 -
Unrealized appreication on available-for
sale securities, net of deferred taxes - - - 13,916,731 - -
Stock options exercised 21,464 - 88,460 - - 8,918
Cash dividend - 689,545 12,928,969 - (13,618,514) -
Cash dividends 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 - - - - 18,349,158 -
Unrealized appreciation on available-for
sale securities, net of deferred taxes - - - 8,364,037 - -
Stock options exercised 21,106 - 165,544 - - (15,799)
Stock dividends 689,545 3,116,810 - - (3,806,355) -
Cash dividend declared - - - - (2,959,043) -
Balance, December 31, 1996 7,612,711 3,806,355 21,114,644 21,624,025 62,761,654 (337,506)
Net income - - - - 8,554,542 -
Unrealized appreciation on available-for
sale securities, net of deferred taxes - - - 7,696,337 - -
Stock options exercised 53,008 - 388,976 - - (15,754)
Stock dividend 3,806,131 (3,806,355) - - - -
Cash dividend declared - - - - (2,675,934) -
Balance, June 30, 1997 11,471,850 - 21,503,620 29,320,362 68,640,262 (353,260)
6
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
June 30, December 31, June 30,
1997 1996 1996
Cash flows provided by operating activities: (Restated)
<S> <C> <C> <C>
Net Income $ 8,554,542 $ 18,349,158 $ 7,432,379
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 456,530 805,784 268,743
Realized investment gains (379,060) (8,468,911) (1,325,457)
Change in:
Deferred insurance acquisition costs (435,949) (3,749,446) (1,807,200)
Unearned premiums 1,411,544 11,703,105 6,752,748
Allowance for doubtful accounts receivable from agents 30,000 60,000 30,000
Accrued investment income 16,262 33,314 65,881
Receivables from agents, insureds and others (4,086,931) (6,898,262) (5,531,855)
Balances due to/from reinsurers 11,772 (136,449) 894,756
Reinsurance recoverable on paid and unpaid losses 797,471 (151,080) 476,244
Funds held by ceding reinsurers 46,300 32,326 (1,268)
Income taxes payable (1,879,263) 1,980,343 676,649
Deferred income taxes 188,835 (68,247) 194,585
Due to/from securities brokers 5,873,473 (6,028,431) 755,324
Prepaid reinsurance premiums 84,847 192,901 331,509
Other assets 379,385 (123,731) (771,620)
Reserve for losses and loss adjustment expenses 2,783,367 9,118,279 2,443,383
Accounts payable 777,696 2,250,075 (382,728)
Accrued premium taxes (402,062) 180,029 (130,659)
Net cash provided by operating activities 14,228,759 19,080,757 10,371,414
Cash flows provided by (used for) investing activities:
Proceeds from sales of available-for-sale investments 12,455,931 27,579,131 2,692,570
Purchases of available-for-sale investments (26,273,105) (49,010,584) (14,411,841)
Maturities of available-for-sale investments 2,167,542 6,917,920 3,971,419
Purchase of depreciable assets (144,160) (1,279,331) (707,035)
Net cash used for investing activities (11,793,792) (15,792,864) (8,454,887)
Cash flows provided by (used for) financing activities:
Cash dividends paid (2,680,685) (3,699,525) (2,221,592)
Stock options exercised 441,984 173,851 61,144
Net proceeds from sale of treasury stock (15,754) 0 0
Net cash used for financing activities (2,254,455) (3,525,674) (2,160,448)
Net increase (decrease) in cash 180,512 (237,781) (243,921)
Cash, beginning of period 364,994 602,775 602,775
Cash, end of period $ 545,506 $ 364,994 $ 358,854
Cash paid during the year for:
Income taxes $ 5,130,000 $ 5,292,665 $ 1,775,000
</TABLE>
7
CAPITOL TRANSAMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(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, 1996, and the Consolidated Statement
of Cash Flows as of December 31, 1996, 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.
Losses and loss adjustment expenses incurred, as well as the related
tax impact, have been restated for 1996 to reflect a more equitable
distribution of the fourth quarter increase in reserves for incurred
but not reported claims.
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 1996 annual
report on Form 10-K. Wherever applicable, prior period's information
has been restated to reflect the December 31,1996 three-for-two stock
dividend and the December 28, 1995 ten percent stock dividend.
(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.
Prior periods' information has been restated to reflect the applicable
stock splits.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share", which is required to be adop-
ted on December 31, 1997. At that time, the Company will be required
to disclose fully diluted earnings per share, in addition to basic
earnings per share, for all periods presented. The impact of State-
ment No. 128 is not expected to be material.
(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 53,008 options exercised during the six months ended June
30, 1997 and there were 5,480 options exercised during the six
Months ended June 30, 1996. For further information regarding stock
options, refer to Note 6 of Notes to Consolidated Financial Statements
included in the Company's 1996 annual report.
(5) Dividends
1997
On May 6, 1997 a cash dividend of $0.07 per share was declared to
shareholders of record June 13 and paid June 27 in the amount of
$780,878.
On January 20, 1997 a cash dividend of $.10 per share was declared to
shareholders of record February 14 and paid February 28 in the amount
of $1,114,823.
On January 20, 1997 as cash dividend of $.07 per share was declared to
shareholders of record March 14 and paid on March 28 in the amount of
$780,458.
1996
On November 4, 1996 a cash dividend of $.10 was declared to share-
holders of record December 6 and paid December 20 in the amount of
$739,360.
On November 4, 1996 a three-for-two stock split was declared to share-
holders of record December 31 and paid January 15, 1997 in the amount
of 3,806,131 shares.
8
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
share-holders 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.
(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 $296,589, $203,830 and $147,986 as of June 30, 1997, December
31, 1996 and June 30, 1996, 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 36 states which writes, through its insurance subsidiaries, both
property-casualty and fidelity-surety insurance. The property-casualty segement
accounts for approximately 70% of the business written while the fidelity-surety
segment accounts for approximately 30% of the Company's 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, 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, 1997 gross premiums written increased 8.7%
over the same period in 1996. The Company's goal for 1997 is a 15% to 18% in-
crease in premiums written. Our plan to reach this goal includes geographic
expansion and new product development. In late 1996, Capitol Indemnity Corp-
oration, the Company's primary insurance subsidiary, became licensed in the
state of Virginia and South Carolina, and in early 1997 the company became
licensed in the state of Tennessee. The Company is also plans to continue
expansion of its workers compensation insurance writings. Equipment
breakdown insurance coverages.
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 $44,911,245, $77,347,319 and
$35,819,095 for the respective periods; and net unearned premiums were
$44,670,377, $43,258,833 and $38,308,476 at each respective period.
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1997 1996 1996
<S> <C> <C> <C>
Gross Premiums Written $47,448,552 $90,939,387 $43,653,295
Reinsurance Ceded 1,040,917 1,696,062 749,943
Net Premiums Written $46,407,635 $89,243,325 $42,903,352
Net Premiums Earned $44,911,245 $77,347,319 $35,819,095
Net Unearned Premium Reserve $44,670,377 $43,258,833 $38,308,476
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): 1997 1996 1996
<S> <C> <C> <C>
Loss and Loss Adjustment Expenses 48.7% 53.5% 50.8%
Underwriting Expenses 34.4% 33.5% 32.2%
Combined Ratios 83.1% 87.0% 83.0%
The Company's combined loss and expense ratios compare very favorably with the industry average of 105.5% for the
full year of 1996.
</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: 1997 1996 1996
<S> <C> <C> <C>
Invested Assets $ 208,402,099 $ 184,801,846 $ 157,949,082
Net Investment Income 4,119,867 7,155,382 3,496,671
Percent of Return to
Average Carrying Value 5.2% 5.1% 5.3%
Realized Gains 379,060 8,468,911 1,325,457
Change in Unrealized Gains(Losses) $ 11,661,117 $ 12,672,783 $ (324,486)
</TABLE>
The $11,661,117 increase in unrealized gains for the first half of 1997 was
composed of a $11,741,595 increase in market value over cost of the Company's
equity securities and a $80,478 decrease in market value over cost of our fix-
ed maturities. The decrease in the fixed maturities was caused by rising inter-
est rates during the first six months. The Company continued to move more of
its investment portfolio into equity securities in the first half of 1997.
Future investment decisions will be determined based on the economy and the
stock and bond markets. Net investment income for the first half of 1997 was
up 18% over the first half of 1996, although the overall rate of return on our
investment portfolio has decreased slightly. Net unrealized gains were
$44,424,791, $32,763,674 and $19,766,405 as of June 30, 1997, December 31,
1996 and June 30, 1996.
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 $50,485,730 as of June 30, 1997 compared with $47,702,363 as of December
31, 1996 and $41,027,467 as of June 30, 1996. 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 (83.6%, 80.7% and 82.6% 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, 1997, December 31, 1996 and June 30, 1996
CAPITOL INDEMNITY CORPORATION June 30, December 31, June 30,
Balance Sheets 1997 1996 1996
<S> <C> <C> <C>
ASSETS (Restated)
Cash and Invested Assets $ 192,334,844 $168,178,260 $141,143,156
Other Receivables 23,523,419 26,667,268 18,993,289
Total Assets $ 215,858,263 $194,845,528 $159,780,478
LIABILITIES
Reserve for Losses and Loss Expenses $ 50,097,813 $ 47,458,573 $ 40,477,786
Unearned Premiums 44,051,076 42,554,685 37,742,936
Other Payables 19,124,764 17,951,399 14,820,634
Total Liabilities 113,273,653 107,964,657 93,041,356
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 102,584,610 86,880,871 66,739,122
Total Liabilities and Capital $ 215,858,263 $194,845,528 $159,780,478
Statements of Income
Premiums Earned $ 44,911,245 $ 77,347,214 $ 35,818,986
Underwriting Deductions 38,096,585 71,777,074 32,290,324
Net Underwriting Gain 6,814,660 5,570,140 3,528,662
Investment Income Including Sales 3,941,775 14,081,370 4,290,217
Other Income 34,222 376,876 47,787
Income Tax Expense 2,877,222 6,462,350 2,364,848
Net Income $ 7,913,435 $ 13,566,036 $ 5,501,818
CAPITOL SPECIALTY INSURANCE CORPORATION
Balance Sheets
ASSETS
Cash and Invested Assets $ 6,948,600 $ 6,468,105 $ 5,883,091
Other Receivables 201,555 102,565 109,416
Total Assets $ 7,150,155 $ 6,570,670 $ 5,992,507
LIABILITIES
Reserve for Losses and Loss Expenses $ - $ - $ -
Unearned Premiums - - -
Other Payables 297,392 9,422 309,443
Total Liabilities 297,392 9,422 309,443
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 6,852,763 6,561,248 5,683,064
Total Liabilities and Capital $ 7,150,155 $ 6,570,670 $ 5,992,507
Statements of Income
Premiums Earned $ 0 $ 105 $ 109
Underwriting Deductions 10,329 18,857 11,043
Net Underwriting Loss (10,329) (18,752) (10,934)
Investment Income Including Sales 159,268 303,575 149,523
Other Income - - -
Income Tax Expense(Benefit) 2,062 (817) (1,049)
Net Income $ 146,877 $ 285,640 $ 139,638
</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 May 5, 1997,
both of which are dated April 4, 1997 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 Retired, formerly with
Capitol Transamerica Corporation Bank One Madison
Sun Prairie, Wisconsin Madison, Wisconsin
Larry Burcalow Reinhart H. Postweiler
Owner and President Retired-formerly with
Yahara Materials, Inc. Flad Affiliated Corp.
Middleton, Wisconsin Madison, Wisconsin
George A. Fait Kenneth P. Urso
Chairman of the Board Owner and Operator
and President Urso and Associates, LLC
Capitol Transamerica Corporation Middleton, Wisconsin
Madison, Wisconsin
Officers
George A. Fait Virgiline M. Schulte
Chairman of the Board and President Vice President
Paul J. Breitnauer Jane F. Endres
Vice President and Treasurer 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: August 6, 1997
17
CAPITOL TRANSAMERICA CORPORATION
FOR IMMEDIATE RELEASE Contact: Paul J. Breitnauer
Phone (608) 231-4450
NEWS RELEASE
ANNOUNCES SIX MONTH EARNINGS
Madison, Wisconsin, July 22, 1997- George A. Fait, Chairman of Capitol
Transamerica Corporation, announced that six months earnings were $8.6 million
or $.77 per share compared with $7.4 million or $.67 per share in 1996, a
15.1% increase. Six months income in 1997 included $250,000 or $0.02 per
share of after-tax realized gains while the six months income in 1996 included
$875,000 or $0.08 per share of after-tax realized gains. Excluding realized
gains, net income for the six months of 1997 was $0.75 per share compared
with $0.59 per share for the same period last year, an increase of 26.6%.
Second quarter 1997 earnings were $4.6 million of $0.41 per share compared
with 1996 second quarter earnings of $4.2 million or $0.38 per share, a 10.0%
increase. Second quarter 1997 earnings included less than $0.01 per share of
after-tax realized gains, whereas the second quareter 1996 included $0.07 per
share. Excluding realized gains, second quarter 1997 and 1996 net income was
$0.41 and $0.30 per share, respectively, an increase of 35.5%. Second quarter
earnings have been restated for 1996 to reflect a more equitable distribution
of the fourth quarter increase in reserves for incurred but not reported
claims.
Six months gross premiums written for 1997 were $47.5 million compared
with $43.7 million for the first six months of 1996, an increase of 8.7%.
Gross premiums written for the second quarter increased from $24.8 million
in 1996 to $27.2 million for the like period in 1997, an increase of 9.6%.
Net investment income for the first six months of 1997 was $4.1 million
compared to $3.5 million for the same period of 1996, an increase of 17.8%.
Net investment income for the second quarter was $2.0 million compared with
$1.8 million for 1996, a 10.4% increase.
Shareholders' investment increased significantly, rising from $98.5
million at June 30, 1996 to $130.6 million at June 30, 1997, a 32.6% increase.
Unrealized appreciation on investments was $44.4 million at June 30, 1997 up
from $19.8 million a year ago, representing a $24.6 million increase. Un-
realized appreciation after tax was $29.3 million and $13.1 million at each re-
spective period. Total invested assets grew from $158.0 million at June 30,
1996 to $208.4 million at June 30, 1997, an increase of 32.0%. Cash dividends
paid in the first six months of 1997 totaled $2.7 million or $0.24 per share.
18
The Company's combined net loss, loss expense and general expense ratio
for the first six months of 1997 was 83.1% compared with 83.0% for the like
period in 1996. The Company's experience continues to be very favorable
compared to the industry average of 105.5% for the year of 1996.
Fait stated that "The Company turned in a solid six month performance
and the outlook for the remainder of the year is positive and on track with
growth and financial goals. We are looking forward to another year of in-
creasing economic value to our shareholders."
Capitol Transamerica Corporation is an insurance holding company operating
a national insurance business writing specialty lines of commercial property
and casualty policies as well as fidelity and surety coverages through its sub-
sidiary insurance companies Capitol Indemnity Corporation and Capitol Specialty
Insurance Corporation. A third subsidiary, Capitol Facilities Corporation, pro-
vides premium financing for the insurance companies.
The Capitol Transamerica Group operates in 36 states and is rated A+
(Superior) by A.M. Best Company, Inc., an independent organization that analyzes
the insurance industry.
Capitol Transamerica Corporation, with 11.2 million shares outstanding,
is traded on the National Over-the-Counter Stock Market under the symbol CATA.
FINANCIAL HIGHLIGHTS FOLLOW
(Adjusted for the December 31, 1996 three-for-two stock split effected
as a fifty percent stock dividend)
19
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION> (in thousands, except per share)
Six months ended Three months ended
June 30, June 30,
1997 1996 1997 1996
(Restated) (Restated)
<S> <C> <C> <C> <C>
REVENUES
Gross premiums written $ 47,449 $ 43,653 $ 27,162 $ 24,776
Net premiums written 46,408 42,903 26,561 24,778
Net premiums earned $ 44,911 $ 35,819 $ 24,551 $ 18,655
EXPENSES
Claims and claim expenses 21,778 18,122 11,890 9,547
Other underwriting expenses 15,674 12,260 8,127 6,300
Total Losses and Expenses Incurred 37,452 30,382 20,017 15,847
Underwriting income 7,459 5,437 4,534 2,808
Investment income 4,120 3,497 1,973 1,787
Realized investment gains 379 1,325 33 1,209
Other income 36 51 30 19
Income Before Income Tax 11,994 10,310 6,570 5,823
Income tax expense 3,439 2,878 2,003 1,671
NET INCOME $ 8,555 $ 7,432 $ 4,567 $ 4,152
EARNINGS PER SHARE $ 0.77 $ 0.67 $ 0.41 $ 0.38
<CAPTION>
COMPARATIVE FINANCIAL HIGHLIGHTS- Six Months Ended June 30,
1997 1996 1995 1994 1993
Per Share Information
<S> <C> <C> <C> <C> <C>
Income per share $ 0.77 $ 0.67 $ 0.63 $ 0.47 $ 0.42
Consolidated net income $ 8,555 $ 7,432 $ 6,906 $ 5,192 $ 4,559
Weighted average number
of shares outstanding 11,111 11,066 11,034 10,980 10,914
Book value per share $ 11.71 $ 8.89 $ 7.38 $ 6.01 $ 5.33
Shareholders' investment $ 130,583 $ 98,457 $ 81,595 $ 66,250 $ 58,250
Dividends paid $ 2,699 $ 2,222 $ 1,205 $ 1,869 $ 1,655
Shares outstanding 11,155 11,076 11,055 11,015 10,935
Company Statistics:
Gross premiums written $ 47,449 $ 43,653 $ 33,930 $ 29,446 $ 23,148
Net investment income $ 4,120 $ 3,497 $ 3,112 $ 2,536 $ 2,439
Invested assets $ 208,402 $ 157,949 $ 123,889 $ 94,417 $ 83,422
Total assets $ 249,184 $ 191,135 $ 151,564 $ 118,197 $ 103,595
Insurance Operating Ratios,
Statutory Basis:
Loss and loss adjustment
expenses: 48.7% 50.8% 51.1% 47.7% 46.3%
Underwriting expenses 34.4% 32.2% 32.5% 32.3% 32.6%
Combined ratios 83.1% 83.0% 83.6% 80.0% 78.9%
20
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
BALANCE SHEETS
(in thousands, except per share)
<CAPTION>
June 30, December 31 June 30,
1997 1996 1996
ASSETS (Restated)
<S> <C> <C> <C>
Cash and investments $ 208,948 $ 185,167 $ 158,308
Receivables 24,592 27,823 19,553
Other assets 15,644 15,895 13,274
TOTAL ASSETS $ 249,184 228,885 $ 191,135
LIABILITIES
Claims and claim expenses $ 50,486 $ 47,702 $ 41,027
Unearned premiums 44,670 43,259 38,309
Other liabilities 23,445 21,342 13,342
TOTAL LIABILITIES $ 118,601 $ 112,303 $ 92,678
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
15,000,000 shares, issued 11,471 850,
11,419,066 and 7,594,085, respectively $ 11,472 $ 11,419 $ 7,594
Paid-in surplus 21,504 21,115 21,005
Unrealized appreciation on securities carried
at fair value, net of deferred taxes 29,320 21,624 13,046
Retained earnings 68,640 62,762 57,134
Less treasury stock, 316,448, 315,769, and
209,831 shares, respectively, at cost (353) (338) (322)
TOTAL SHAREHOLDERS' EQUITY $ 130,583 $ 116,582 $ 98,457
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 249,184 $ 228,885 $ 191,135
SHAREHOLDERS' EQUITY PER SHARE $ 11.71 $ 10.50 $ 8.89
Increase in Shareholder's Equity -
June 30, 1996 to June 30, 1997 32.6%
June 30, 1995 to June 30, 1996 20.7%
21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 73,681,394
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 126,529,295
<MORTGAGE> 0
<REAL-ESTATE> 7,191,665
<TOTAL-INVEST> 208,402,099
<CASH> 545,506
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 13,414,263
<TOTAL-ASSETS> 249,183,999
<POLICY-LOSSES> 50,485,730
<UNEARNED-PREMIUMS> 44,670,377
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 11,471,850
0
0
<OTHER-SE> 119,110,984
<TOTAL-LIABILITY-AND-EQUITY> 249,183,999
44,911,245
<INVESTMENT-INCOME> 4,119,867
<INVESTMENT-GAINS> 379,060
<OTHER-INCOME> 36,352
<BENEFITS> 21,777,719
<UNDERWRITING-AMORTIZATION> (435,949)
<UNDERWRITING-OTHER> 16,110,654
<INCOME-PRETAX> 11,994,100
<INCOME-TAX> 3,439,558
<INCOME-CONTINUING> 8,554,542
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,554,542
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.77
<RESERVE-OPEN> 47,702,363
<PROVISION-CURRENT> 16,548,664
<PROVISION-PRIOR> 5,229,055
<PAYMENTS-CURRENT> 6,376,578
<PAYMENTS-PRIOR> 12,693,581
<RESERVE-CLOSE> 50,485,730
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
