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, 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 1/4) and low price (27), the
aggregate market value of voting stock held by non-affiliates of the
registrant as of September 30, 1997 was approximately $302,913,094.
Indicate the number of shares of each of the issuer's class of common stock, as
of the latest practicable date:
At September 30, 1997
Common Stock, $1.00 Par Value;
Issued: 11,484,503
Outstanding: 11,167,303
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>
September 30, December 31, September 30,
1997 1996 1996
<S> <C> <C> <C>
ASSETS
Investments:
Available-for-sale investment securities, at fair value
U.S. Government bonds (amortized cost $68,734, $578,852
and $583,001, respectively) $ 72,917 $ 583,395 $ 585,840
State, municipal and political subdivision bonds (amortized
cost $66,496,343, $75,906,193 and $69,090,451, respectively) 71,176,467 80,590,881 73,968,241
Corporate bonds and notes (amortized cost $716,015,
$1,321,999 and $885,435, respectively) 769,966 1,392,449 950,889
Equity securities:
Common stock (cost $85,111,557, $59,099,459 and
$59,712,327, respectively) 134,527,313 86,569,214 81,044,096
Nonredeemable preferred stock (cost $5,116,216, $5,346,938
and $5,575,266, respectively) 6,403,480 5,881,180 5,934,273
Investment real estate, at cost, net of depreciation 7,868,693 6,721,343 3,415,803
Short-term investments, at cost which
approximates fair value 5,522,365 3,063,384 5,014,824
Total Investments 226,341,201 184,801,846 170,913,966
Cash 475,062 364,994 197,119
Accrued investment income 1,671,665 1,684,940 1,633,703
Receivables from agents, insureds and others, less allowance for
doubtful accounts of $425,000, $380,000 and $365,000, respectively 22,547,993 18,712,387 18,534,193
Balances due from reinsurers 193,452 1,033,058 385,595
Funds held by ceding reinsurers - 44,791 78,385
Deferred insurance acquisition costs 14,118,308 12,978,314 12,141,461
Prepaid reinsurance premiums 696,926 704,148 624,813
Due from securities brokers 3,761,914 6,347,754 1,117,147
Income taxes receivable - - 425,786
Other assets 1,374,816 2,213,222 1,803,862
Total Assets $271,181,337 $228,885,454 $207,856,030
</TABLE>
3
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
(Restated)
<S> <C> <C> <C>
LIABILITIES
Policy liabilities and accruals:
Reserve for losses $ 34,401,938 $ 29,811,723 $ 27,990,979
Reserve for loss adjustment expenses 19,944,276 17,890,640 15,818,749
Unearned premiums 47,059,499 43,258,833 41,328,110
Total Policy Liabilities and Accruals 101,405,713 90,961,196 85,137,838
Accounts payable 7,430,460 6,612,383 4,925,124
Dividends payable - 4,526 -
Due to securities brokers - 474,281 561,922
Balances due to reinsurers 1,922,623 1,776,524 2,033,123
Accrued premium taxes 222,580 562,573 407,440
Income taxes payable 277,354 1,870,252 -
Deferred income taxes 17,841,772 10,041,836 8,215,514
Total Other Liabilities 27,694,789 21,342,375 16,143,123
Total Liabilities 129,100,502 112,303,571 101,280,961
SHAREHOLDERS' INVESTMENT
Common stock, $1.00 par value, authorized 15,000,000 shares,
issued 11,484,503, 7,612,711 and 7,595,739, respectively 11,484,503 7,612,711 7,595,739
Common stock distributable, 3,806,355 shares at $1.00 par value - 3,806,355 -
Paid-in surplus 21,582,389 21,114,644 21,017,462
Net unrealized appreciation on investment securities carried at
fair value, net of deferred taxes of $18,850,035, $11,139,649
and $9,056,532, respectively 36,591,241 21,624,025 17,580,326
Retained earnings 72,796,128 62,761,654 60,703,249
Shareholders' investment before treasury stock 142,454,261 116,919,389 106,896,776
Treasury stock, 317,200, 315,769 and 209,831 shares,
respectively, at cost (373,426) (337,506) (321,707)
Total Shareholders' Investment 142,080,835 116,581,883 106,575,069
Total Liabilities and Shareholders' Investment $271,181,337 $228,885,454 $207,856,030
Book Value Per Share $ 12.72 $ 10.50 $ 9.62
Shares Outstanding 11,167,303 11,103,297 11,078,862
</TABLE>
4
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Six Months For the Three Months
<CAPTION> Ended September 30, Ended September 30,
1997 1996 1997 1996
(Restated) (Restated)
<S> <C> <C> <C> <C>
REVENUES
Premiums earned $ 66,059,628 $ 56,098,839 $ 21,148,383 $ 20,279,744
Net investment income 6,240,578 5,260,747 2,120,711 1,764,076
Realized investment gains 4,030,552 2,590,704 3,651,492 1,265,247
Other revenues 20,746 81,992 (15,606) 31,539
Total Revenues 76,351,504 64,032,282 26,904,980 23,340,606
LOSSES INCURRED & EXPENSES
Losses incurred 27,747,434 21,043,154 10,400,059 6,742,969
Loss adjustment expenses incurred 7,256,117 7,708,037 2,825,773 3,886,088
Underwriting, acquisition and
insurance expenses 22,381,220 21,372,398 6,915,351 7,863,238
Increase in deferred insurance
acquisition costs (1,139,994) (2,912,593) (704,045) (1,105,393)
Other expenses 973,017 674,438 328,232 116,839
Total Losses and Expenses Incurred 57,217,794 47,885,434 19,765,370 17,503,741
Income from operations before
income taxes 19,133,710 16,146,848 7,139,610 5,836,865
Income tax expense (benefit)
Current 5,552,040 5,208,072 2,301,317 1,910,604
Deferred 89,550 (801,736) (99,285) (381,872)
5,641,590 4,406,336 2,202,032 1,528,732
Net Income $ 13,492,120 $ 11,740,512 $ 4,937,578 $ 4,308,133
INCOME PER SHARE $ 1.21 $ 1.06 $ 0.44 $ 0.39
Weighted Average Number of Shares Outstanding 11,130,388 11,070,855 11,130,388 11,070,855
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 24,106 - 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 - - - - 13,492,120 -
Unrealized appreciation on available-for
sale securities, net of deferred taxes - - - 14,967,216 - -
Stock options exercised 65,661 - 467,745 - - (35,920)
Stock dividend 3,806,131 (3,806,355) - - - -
Cash dividend declared - - - - (2,675,934) -
Balance, September 30, 1997 11,484,503 - 21,582,389 36,591,241 72,796,128 (373,426)
6
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
September 30, December 31, September 30,
1997 1996 1996
Cash flows provided by operating activities: (Restated)
<S> <C> <C> <C>
Net Income $ 13,492,120 $ 18,349,158 $ 11,740,512
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 727,618 805,784 567,894
Realized investment gains (4,030,552) (8,468,911) (2,590,704)
Change in:
Deferred insurance acquisition costs (1,139,994) (3,749,446) (2,912,593)
Unearned premiums 3,800,666 11,703,105 9,772,382
Allowance for doubtful accounts receivable from agents 45,000 60,000 45,000
Accrued investment income 13,275 33,314 84,551
Receivables from agents, insureds and others (3,880,606) (6,898,262) (6,705,068)
Balances due to/from reinsurers 150,595 (136,449) 1,212,331
Reinsurance recoverable on paid and unpaid losses 835,110 (151,080) 503,780
Funds held by ceding reinsurers 44,791 32,326 (1,268)
Income taxes payable (1,592,898) 1,980,343 (315,695)
Deferred income taxes 89,550 (68,247) 188,548
Due to/from securities brokers 2,111,559 (6,028,431) (710,183)
Prepaid reinsurance premiums 7,222 192,901 272,236
Other assets 498,812 (123,731) (826,310)
Reserve for losses and loss adjustment expenses 6,643,851 9,118,279 5,225,644
Accounts payable 818,077 2,250,075 562,815
Accrued premium taxes (339,993) 180,029 24,896
Net cash provided by operating activities 18,294,203 19,080,757 16,138,768
Cash flows provided by (used for) investing activities:
Proceeds from sales of available-for-sale investments 19,402,712 27,579,131 11,046,337
Purchases of available-for-sale investments (38,392,532) (49,010,584) (29,103,232)
Maturities of available-for-sale investments 3,990,509 6,917,920 5,469,710
Purchase of depreciable assets (219,914) (1,279,331) (1,072,571)
Net cash used for investing activities (15,219,225) (15,792,864) (13,659,756)
Cash flows provided by (used for) financing activities:
Cash dividends paid (3,462,172) (3,699,525) (2,960,166)
Stock options exercised 533,182 173,851 75,496
Net proceeds from stock swaps (35,920) 0 0
Net cash used for financing activities (2,964,910) (3,525,674) (2,884,670)
Net increase (decrease) in cash 110,068 (237,781) (405,658)
Cash, beginning of period 364,994 602,775 602,775
Cash, end of period $ 475,062 $ 364,994 $ 197,117
Cash paid during the year for:
Income taxes $ 7,099,520 $ 5,292,665 $ 4,175,000
</TABLE>
7
CAPITOL TRANSAMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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
split effected as a stock dividend and the December 28, 1995 ten per-
cent 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.
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 65,661 options exercised during the nine months ended Sep-
tember 30, 1997 and there were 17,134 options exercised during the
nine months ended September 30, 1996. For further information regard-
ing stock options, refer to Note 6 of Notes to Consolidated Financial
Statements included in the Company's 1996 annual report.
(5) Dividends
1997
On July 25, 1997 a cash dividend of $.07 per share was declared to
shareholders of record September 12 and paid September 26 in the a-
mount of $788,396.
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.
8
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 distributed January 15, 1997 in the
amount of 3,806,131 shares.
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 $375,370, $203,830 and $158,486 as of September 30, 1997, De-
cember 31, 1996 and September 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. Capitol
Facilities Corporation, a third subsidiary, provides premium financing for the
insurance companies.
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
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 into new geographic territories.
The ability to maintain a steady combined ratio, typically 15 to 20 points be-
low the industry average, is due to its basic philosophy of generating under-
writing profits. When the industry's cycle reverses, the Company will be in an
excellent position to take advantage of premium rate increases which will bene-
fit the Company's overall profitability.
For the nine months ended September 30, 1997 gross premiums written increased
11.2% over the same period in 1996. The Company's goal for 1997 is a 15% to 18%
increase 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
states of Virginia and South Carolina, and in early 1997 the company became
licensed in the state of Tennessee. The Company plans to continue expansion
into new states as well as expansion of its workers compensation and equip-
ment 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 $66,059,628, $77,347,319 and
$56,098,839 for the respective periods; and net unearned premiums were
$47,059,499, $43,258,833 and $41,328,110 at each respective period.
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
<S> <C> <C> <C>
Gross Premiums Written $75,017,251 $90,939,387 $67,444,696
Reinsurance Ceded 5,149,735 1,696,062 1,301,239
Net Premiums Written $69,867,516 $89,243,325 $66,143,457
Net Premiums Earned $66,059,628 $77,347,319 $56,098,839
Net Unearned Premium Reserve $47,059,499 $43,258,833 $41,328,110
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,
September 30, December 31, 1996
Insurance Operating Ratios (Statutory Basis): 1997 1996 (Restated)
<S> <C> <C> <C>
Loss and Loss Adjustment Expenses 53.3% 53.5% 51.5%
Underwriting Expenses 33.0% 33.5% 31.8%
Combined Ratios 86.3% 87.0% 83.3%
The Company's combined loss and expense ratios compare very favorably with the industry average of 105.5% for the
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>
September 30, December 31, September 30,
Investments: 1997 1996 1996
<S> <C> <C> <C>
Invested Assets $ 226,341,201 $ 184,801,846 $ 170,913,966
Net Investment Income 6,240,578 7,155,382 5,260,747
Percent of Return to
Average Carrying Value 5.2% 5.1% 5.1%
Realized Gains 4,030,552 8,468,911 2,590,704
Change in Unrealized Gains(Losses) $ 14,967,215 $ 12,672,783 $ 6,545,967
</TABLE>
The $14,967,215 increase in unrealized gains for the nine months of 1997 was
composed of a $14,981,355 increase in market value over cost of the Company's
equity securities and a $14,140 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 nine months. The Company has continued to move more
of its investment portfolio into equity securities in 1997. Future investment
decisions will be determined based on the economy and the stock and bond mar-
kets. Net investment income for the nine months of 1997 was up 18.6% over the
like period of 1996, and the overall rate of return on our investment portfolio
increased slightly. Before tax unrealized gains were $55,441,276, $32,763,674
and $26,636,858 as of September 30, 1997, December 31, 1996 and September 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 reserves for loss and loss adjustment ex-
penses were $54,346,214 as of September 30, 1997 compared with $47,702,363 as
of December 31, 1996 and $43,809,728 as of September 30, 1996. 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 (83.5%, 80.7% and 82.2% 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, 1997, December 31, 1996 and September 30, 1996
CAPITOL INDEMNITY CORPORATION September 30, December 31, September 30,
Balance Sheets 1997 1996 1996
<S> <C> <C> <C>
ASSETS (Restated)
Cash and Invested Assets $ 208,982,133 $168,178,260 $153,725,448
Other Assets 26,690,914 26,667,268 21,197,038
Total Assets $ 235,673,047 $194,845,528 $174,922,486
LIABILITIES
Reserve for Losses and Loss Expenses $ 54,035,917 $ 47,458,573 $ 43,289,874
Unearned Premiums 46,362,573 42,554,685 40,703,297
Other Liabilities 17,876,059 17,951,399 14,858,845
Total Liabilities 118,274,549 107,964,657 98,852,016
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 117,398,498 86,880,871 76,070,470
Total Liabilities and Capital $ 235,673,047 $194,845,528 $174,922,486
Statements of Income
Premiums Earned $ 66,059,628 $ 77,347,214 $ 56,098,730
Underwriting Deductions 58,694,656 71,777,074 50,935,782
Net Underwriting Gain 7,364,972 5,570,140 5,162,948
Investment Income Including Sales 9,438,887 14,081,370 7,065,139
Other Income 12,386 376,876 77,940
Income Tax Expense 4,964,690 6,462,350 3,728,085
Net Income $ 11,851,555 $ 13,566,036 $ 8,577,942
CAPITOL SPECIALTY INSURANCE CORPORATION
Balance Sheets
ASSETS
Cash and Invested Assets $ 7,115,334 $ 6,468,105 $ 6,209,169
Other Assets 660,615 102,565 90,116
Total Assets $ 7,775,949 $ 6,570,670 $ 6,299,285
LIABILITIES
Payable to Parent $ 290,000 $ - $ 300,000
Other Liabilities 587,157 9,422 20,049
Total Liabilities 877,157 9,422 320,049
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 6,898,792 6,561,248 5,979,236
Total Liabilities and Capital $ 7,775,949 $ 6,570,670 $ 6,299,285
Statements of Income
Premiums Earned $ 0 $ 105 $ 109
Underwriting Deductions 11,412 18,857 15,397
Net Underwriting Loss (11,412) (18,752) (15,288)
Investment Income Including Sales 230,232 303,575 227,503
Income Tax Expense(Benefit) 2,039 (817) (757)
Net Income $ 216,781 $ 285,640 $ 212,972
</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 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: November 6, 1997
17
CAPITOL TRANSAMERICA CORPORATION
ANNOUNCES NINE MONTHS EARNINGS
FOR IMMEDIATE RELEASE Contact: Paul J. Breitnauer
Phone (608) 231-4450
Madison, Wisconsin, October 23, 1997 - George A. Fait, Chairman of Capitol
Transamerica Corporation, announced that nine months earnings were $13.5 million
or $1.21 per share compared with $11.7 million or $1.06 per share in 1996, an
increase of 14.9%. Nine months income in 1997 included $2.7 million or $0.24
per share of after-tax realized gains while the nine months income of 1996 in-
cluded $1.7 million or $0.15 per share of after-tax realized gains. Excluding
realized gains, net income for the nine months of 1997 was $0.97 per share com-
pared with $0.91 per share for the same period last year, an 8.0% increase.
Third quarter 1997 earnings were $4.9 million of $0.44 per share compared
with 1996 third quarter earnings of $4.3 million or $0.39 per share, an in-
crease of 14.6%. Third quarter 1997 earnings included $0.22 per share of after-
tax realized gains, whereas the third quareter 1996 included $0.08 per share.
Excluding net realized gains, third quarter 1997 and 1996 net income was $0.23
and $0.31 per share, respectively. Third quarter earnings have been restated
for 1996 to reflect a more equitable distribution of the increase in reserves
for incurred but not reported claims booked in December of 1996.
Nine months gross premiums written for 1997 were $75.0 million compared
with $67.4 million for the first nine months of 1996, an increase of 11.2%.
Gross premiums written for the third quarter increased from $23.8 million
in 1996 to $27.6 million for the like period in 1997, an increase of 15.9%.
Net investment income for the first nine months of 1997 was $6.2 million
compared to $5.3 million for the same period of 1996, an increase of 18.6%.
Net investment income for the third quarter was $2.1 million compared with
$1.8 million for 1996, a 20.2% increase.
Shareholders' investment increased significantly, rising from $106.6
million at September 30, 1996 to $142.1 million at September 30, 1997, a 33.3%
increase. Unrealized appreciation on investments before tax was $55.4 million
at September 30, 1997 up from $26.6 million a year ago, representing a $28.8
million increase. Unrealized appreciation after tax was $36.6 million and
$17.6 million at each respective period. Total invested assets grew from
$170.9 million at September 30, 1996 to $226.3 million at September 30, 1997,
an increase of 32.4%. Cash dividends paid in the first nine months of 1997 to-
taled $3.5 million or $0.31 per share.
18
The Company's combined net loss, loss expense and general expense ratio
for the first nine months of 1997 was 86.3% compared with 83.3% for the like
period in 1996. The Company's experience continues to be favorable compared to
the industry average of 105.5% for the year of 1996.
Fait stated that "There was increased loss activity in the third quarter
for both the property and casualty lines as well as the contract surety lines.
Further, there has been increased competition in rates and underwriting for the
better classes of property and casualty and fidelity and surety accounts. This
type of competition could eventually lead to increased loss ratios for the
Company."
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)
Nine months ended Three months ended
September 30, September 30,
1997 1996 1997 1996
(Restated) (Restated)
<S> <C> <C> <C> <C>
REVENUES
Gross premiums written $ 75,017 $ 67,444 $ 27,569 $ 23,791
Net premiums written 69,868 66,143 23,460 23,240
Net premiums earned $ 66,060 $ 56,099 $ 21,148 $ 20,280
EXPENSES
Claims and claim expenses 35,004 28,751 13,226 10,629
Other underwriting expenses 22,214 19,134 6,539 6,875
Total Losses and Expenses Incurred 57,218 47,885 19,765 17,504
Underwriting income 8,842 8,214 1,383 2,776
Investment income 6,241 5,261 2,121 1,764
Realized investment gains 4,030 2,590 3,652 1,265
Other income 21 82 (16) 32
Income Before Income Tax 19,134 16,147 7,140 5,837
Income tax expense 5,642 4,406 2,202 1,529
NET INCOME $ 13,492 $ 11,741 $ 4,938 $ 4,308
EARNINGS PER SHARE $ 1.21 $ 1.06 $ 0.44 $ 0.39
<CAPTION>
COMPARATIVE FINANCIAL HIGHLIGHTS- Nine Months Ended September 30,
1997 1996 1995 1994 1993
Per Share Information
<S> <C> <C> <C> <C> <C>
Income per share $ 1.21 $ 1.06 $ 0.89 $ 0.71 $ 0.61
Consolidated net income $ 13,492 $ 11,741 $ 9,763 $ 7,794 $ 6,655
Weighted average number
of shares outstanding 11,130 11,071 11,041 11,000 10,925
Book value per share $ 12.72 $ 9.62 $ 7.87 $ 6.18 $ 5.50
Shareholders' investment $ 142,081 $ 106,575 $ 87,043 $ 68,148 $ 60,293
Dividends paid $ 3,487 $ 2,979 $ 1,871 $ 2,404 $ 2,487
Shares outstanding 11,167 11,079 11,061 11,026 10,970
Company Statistics:
Gross premiums written $ 75,017 $ 67,444 $ 52,173 $ 44,913 $ 36,935
Net investment income $ 6,241 $ 5,261 $ 4,781 $ 3,889 $ 3,673
Invested assets $ 226,341 $ 170,914 $ 137,768 $ 101,051 $ 86,915
Total assets $ 271,181 $ 207,856 $ 163,903 $ 124,806 $ 109,512
Insurance Operating Ratios,
Statutory Basis:
Loss and loss adjustment
expenses: 53.3% 51.5% 50.5% 47.9% 49.6%
Underwriting expenses 33.0% 31.8% 32.9% 31.9% 32.6%
Combined ratios 86.3% 83.3% 83.4% 79.8% 82.2%
20
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
BALANCE SHEETS
(in thousands, except per share)
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
ASSETS (Restated)
<S> <C> <C> <C>
Cash and investments $ 226,816 $ 185,167 $ 171,111
Receivables 28,175 27,823 22,175
Other assets 16,190 15,895 14,570
TOTAL ASSETS $ 271,181 228,885 $ 207,856
LIABILITIES
Claims and claim expenses $ 54,346 $ 47,702 $ 43,810
Unearned premiums 47,059 43,259 41,328
Other liabilities 27,695 21,342 16,143
TOTAL LIABILITIES $ 129,100 $ 112,303 $ 101,281
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
15,000,000 shares, issued 11,484,503,
11,419,066 and 7,595,739, respectively $ 11,485 $ 11,419 $ 7,596
Paid-in surplus 21,582 21,115 21,018
Unrealized appreciation on securities carried
at fair value, net of deferred taxes 36,591 21,624 17,580
Retained earnings 72,796 62,762 60,703
Less treasury stock, 317,200, 315,769, and
209,831 shares, respectively, at cost (373) (338) (322)
TOTAL SHAREHOLDERS' EQUITY $ 142,081 $ 116,582 $ 106,575
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 271,181 $ 228,885 $ 207,856
SHAREHOLDERS' EQUITY PER SHARE $ 12.72 $ 10.50 $ 9.62
SHARES OUTSTANDING (ADJUSTED) 11,167 11,103 11,079
Increase in Shareholder's Equity -
September 30, 1996 to September 30, 1997 33.3%
December 31, 1995 to December 31,1996 25.8%
September 30, 1995 to September 30, 1996 22.4%
21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 72,019,350
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 140,930,793
<MORTGAGE> 0
<REAL-ESTATE> 7,868,693
<TOTAL-INVEST> 226,341,201
<CASH> 475,062
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 14,118,308
<TOTAL-ASSETS> 271,181,337
<POLICY-LOSSES> 54,346,214
<UNEARNED-PREMIUMS> 47,059,499
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 11,484,503
0
0
<OTHER-SE> 130,596,332
<TOTAL-LIABILITY-AND-EQUITY> 271,181,337
66,059,628
<INVESTMENT-INCOME> 6,240,578
<INVESTMENT-GAINS> 4,030,552
<OTHER-INCOME> 20,746
<BENEFITS> 35,003,551
<UNDERWRITING-AMORTIZATION> (1,139,994)
<UNDERWRITING-OTHER> 23,354,237
<INCOME-PRETAX> 19,133,710
<INCOME-TAX> 5,641,590
<INCOME-CONTINUING> 13,492,120
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,492,120
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.21
<RESERVE-OPEN> 47,702,363
<PROVISION-CURRENT> 27,173,032
<PROVISION-PRIOR> 7,830,519
<PAYMENTS-CURRENT> 11,465,627
<PAYMENTS-PRIOR> 16,979,326
<RESERVE-CLOSE> 54,346,214
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
