SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission file number: 0-2047
CAPITOL TRANSAMERICA CORPORATION
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 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 dur-
ing the preceding twelve months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing re-
quirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this form
10-K. { }
Based on the closing average of the bid (20 1/4) and asked price (20 3/4), the
aggregate market value of voting stock held by non-affiliates of the registrant
as of March 6, 1998 was approximately $229,406,316.
Indicate the number of shares of each of the issuer's class of common stock, as
of the latest practicable date:
At March 6, 1998
Common Stock, $1.00 Par Value
Issued: 11,511,630
Outstanding: 11,190,552
DOCUMENTS INCORPORATED BY REFERENCE
Schedule P of the Annual Statements of Capitol Indemnity Corporation and Capitol
Specialty Insurance Corporation are incorporated by reference into Part I. Por-
tions of the proxy statement for the annual shareholders meeting to be held
May 11, 1998 are incorporated by reference into Part III.
Total Pages: 37
Form 10-K (Annual Report)
Capitol Transamerica Corporation
Part I
Item 1. Business
(a) General Development of Business
Capitol Transamerica Corporation (CTC) is a holding company with assets
exceeding $286 million. CTC was formed in 1965 and owns 100% of Capitol
Indemnity Corporation (CIC), Capitol Specialty Insurance Corporation (CSIC)
and Capitol Facilities Corporation (CFC). Both CIC and CSIC are property
and casualty insurance companies. The companies write a complete port-
folio of fidelity and surety bonds and specialty insurance coverages. CIC
operates on an admitted basis in thirty-five states and on an excess/sur-
plus lines basis in one state. CFC provides premium financing for the
insurance companies.
Some of the specialty property and casualty coverages written are: Barber &
Beauty Shops, Bowling Alleys, Contractors/Manufacturers, Day Care Centers,
Deer Hunters Accident, Detective/Guard Agencies, Equipment Breakdown, Golf
Courses, Nurses Professional, Resorts/Campgrounds, Restaurants, Special
Events, Clubs, Sportsman's Accident, Tanning/Toning Salons and Taverns.
The full line of surety and fidelity bonds includes: Contractor's Perfor-
mance and Payment Bonds, License/Permit Bonds, Fiduciary Bonds, Judicial
Bonds and Commercial Fidelity Bonds.
The results of operations have remained most favorable since 1986 with sub-
stantial increases in premium volume, profitability and shareholders'
investment.
(b) Information about Industry Segments
General:
The subsidiaries of the Company, through licensed agents, are involved only
in the business of underwriting property, casualty, fidelity and surety in-
surance on selected risks. The Company conducts business with insurance
agents located throughout the United States. As of December 31, 1997 and
1996, no amount due from agents located in any one state exceeded 15% of
total balances; no industry segment other than insurance amounted to 10% or
more of the Company's gross or net income and no agent had writings in ex-
cess of 10% of the Company's gross premiums in 1997, 1996 or 1995. During
1997, 1996 and 1995, direct premiums written in Wisconsin accounted for
approximately 17%, 18% and 21%, respectively, of the total direct premiums
written by the Company.
(c) Narrative Description of Business
Competitive Conditions:
All business written by the Company is highly competitive in the areas
of price, service and agent relationships. The large number of insurers
transacting business at rates which are independently regulated by their
respective insurance departments compete aggressively for desireable busi-
ness. Because of limitations in capacity and other regulatory restrictions,
companies the size of CIC are sometimes at a disadvantage when competing
with larger insurance companies.
CIC is required by the Insurance Commissioner of the State of Wisconsin to
maintain a minimum compulsory surplus (surplus as regards policyholders) of
25% of net premiums written during the preceding twelve months. As of
December 31, 1997, CIC reported $109.3 million surplus as regards policy-
holders, approximately $86.5 million in excess of the required amount. In
addition, CIC is required to report a minimum 60% loss and loss expense
ratio for the most current three years on certain liability lines as well
as a minimum 65% ratio on the workers compensation line. Based upon actual
historical experience the ratios are substantially less than the require-
ment and had the company not included the excess statutory reserves over
statement reserves in reporting to regulatory authorities, surplus would
have been $119.6 million at December 31, 1997.
Importance and Effect of Licenses:
Generally speaking, insurance companies must be licensed in the states in
which the insurance is written. Forms and rates for each policy offered are
filed with individual state insurance departments.
Number of Persons Employed:
Capitol Transamerica Corporation and subsidiaries employ 176 people.
Information as to Similar Products or Services:
Gross premiums written, reinsurance ceded and net premiums written for the
past five years are as follows:
<TABLE>
<CAPTION>
1997
Gross Ceded Net
<S> <C> <C> <C>
Accident and Health $ 5,090,314 $4,817,208 $ 273,106
Burglary and Glass 4,189 - 4,189
Fidelity 1,230,700 22,697 1,208,003
Fire and Allied Lines 424,516 4,296 420,220
Inland Marine 1,076,850 953,052 123,798
Liability 10,967,296 143,567 10,823,729
Commercial Multiple Peril 52,132,045 1,599,619 50,532,426
Workers' Compensation 3,381,685 0 3,381,685
Surety 25,200,251 402,612 24,797,639
$99,507,846 $7,943,051 $91,564,795
<CAPTION>
1996
Gross Ceded Net
<S> <C> <C> <C>
Accident and Health $ 238,615 $ - $ 238,615
Burglary and Glass 32,189 - 32,189
Fidelity 1,317,643 25,958 1,291,685
Fire and Allied Lines 698,783 (271) 699,054
Inland Marine 987,201 2,802 984,399
Liability 13,048,828 130,503 12,918,325
Commercial Multiple Peril 48,790,958 1,027,117 47,763,841
Workers' Compensation 2,470,176 17,104 2,453,072
Surety 23,354,994 492,849 22,862,145
$90,939,387 $1,696,062 $89,243,325
<CAPTION>
1995
Gross Ceded Net
<S> <C> <C> <C>
Accident and Health $ 222,137 $ - $ 222,137
Burglary and Glass 52,045 - 52,045
Fidelity 1,355,259 66,854 1,288,405
Fire and Allied Lines 593,309 10,561 582,748
Inland Marine 76,325 3,208 73,117
Liability 10,575,070 430,641 10,144,429
Commercial Multiple Peril 41,254,997 1,451,561 39,803,436
Workers' Compensation 1,942,861 74,422 1,868,439
Surety 14,806,489 484,277 14,322,212
$70,878,492 $2,521,524 $68,356,968
<CAPTION>
1994
Gross Ceded Net
<S> <C> <C> <C>
Accident and Health $ 223,193 $ - $ 223,193
Burglary and Glass 50,646 - 50,646
Fidelity 1,059,233 90,495 968,738
Fire and Allied Lines 797,229 43,821 753,408
Inland Marine 98,927 3,524 95,403
Liability 9,309,300 307,242 9,002,058
Reinsurance 22,359 - 22,359
Commercial Multiple Peril 37,639,679 994,496 36,645,183
Workers' Compensation 1,623,361 57,099 1,566,262
Surety 7,740,415 415,724 7,324,691
$58,564,342 $1,912,401 $56,651,941
<CAPTION>
1993
Gross Ceded Net
<S> <C> <C> <C>
Accident & Health $ 152,602 $ - $ 152,602
Burglary and Glass 101,171 4,798 96,373
Fidelity 975,077 39,716 935,361
Fire and Allied Line 745,596 52,386 693,210
Inland Marine 132,492 5,481 127,011
Liability 7,429,388 279,170 7,150,218
Reinsurance 3,131 - 3,131
Commercial Multiple Peril 30,932,976 1,710,817 29,222,159
Workers' Compensation 2,381,194 29,596 2,351,598
Surety 7,492,901 318,500 7,174,401
$50,346,528 $2,440,464 $47,906,064
</TABLE>
(d) Copies of "Schedule P" of the Annual Statements filed with State Regulatory
Authorities by CIC and CSIC are incorporated herein by reference and are
available upon request.
(e) Discussion Topics
The following discussion topics, if applicable, have been included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and/or the Notes to Consolidated Financial Statements and the
accompanying Schedules which appear elsewhere in this Annual Report:
(1) Reinsurance transactions which have a material effect on earn-
ings or reserves.
(2) Significant reserving assumptions including any recent changes.
(3) The nature of recent changes in the terms under which reinsur-
ance is ceded to other insurers.
(4) Changes in the mix of business, including but not limited to
changes in the location of business, geographic mix and types
of risks assumed.
(5) Changes in payment patterns due to portfolio loss transfers,
structured settlements and other transactions or circumstances.
(6) Unusually large losses or gains.
(f) Reconciliation of Loss and Loss Adjustment Expense Reserves:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balances as of January 1, $ 47,702,363 $ 38,584,084 $ 27,475,323
Reinsurance balances 225,367 (45,321) (12,363)
Net reserves 47,927,730 38,538,763 27,462,960
Incurred losses and loss adjustment expenses related to:
Current year 43,042,827 36,041,564 27,224,006
Prior years:
Direct losses (net of recoveries) 10,725,730 1,516,382 2,610,999
Direct loss adjustment expenses
(net of recoveries) 2,141,661 1,901,083 2,810,145
Discontinued assumed reinsurance 5,218,184 1,706,747 1,454,313
Total prior years 18,085,575 5,124,212 6,875,457
Total incurred 61,128,402 41,165,776 34,099,463
Paid losses and loss adjustment expenses related to:
Current year 16,327,601 15,487,239 10,632,490
Prior years 21,160,666 16,245,614 12,285,492
Total paid 37,488,267 31,732,853 22,917,982
Other adjustments, net (96,121) (43,956) (105,678)
Net balance at December 31 71,471,744 47,927,730 38,538,763
(Less) plus reinsurance balances 594 (225,367) 45,321
Balance at December 31, $ 71,472,338 $ 47,702,363 $ 38,584,084
(g) Loss Reserve Development Consolidated (in millions of dollars)
<CAPTION>
Year ended: 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for losses and loss
adjustment expense $ 15.3 $ 14.2 $ 14.1 $ 14.5 $ 18.1 $ 19.3 $ 27.5 $ 38.5 $ 47.7 $ 71.5
Re-estimated reserves:
One year later 14.1 15.3 15.0 19.5 21.2 25.5 33.8 43.4 65.8
Two years later 15.5 16.1 18.3 21.3 23.8 31.2 37.5 57.7 -
Three years later 16.1 18.1 19.9 22.7 28.3 33.5 51.4 - -
Four years later 17.5 19.2 21.3 25.9 30.7 43.6 - - -
Five years later 18.6 20.2 23.8 27.9 38.6 - - - -
Six years later 19.6 21.8 25.6 34.7 - - - - -
Seven years later 21.1 23.6 31.6 - - - - - -
Eight years later 22.8 28.6 - - - - - - -
Nine years later 27.9 - - - - - - - -
Cumulative deficiency (12.6) (14.4) (17.5) (20.2) (20.5) (24.3) (23.9) (19.2) (18.1)
Cumulative deficiency from
discontinued reinsurance
assumed operations (14.5) (14.0) (13.4) (12.6) (11.4) (10.4) (9.3) (8.4) (6.9)
Cumulative redundancy
(deficiency) from
continuing operations 1.9 (0.4) (4.1) (7.6) (9.1) (13.9) (14.6) (10.8) (11.2)
Cumulative amount of liability paid through:
One year later 4.6 5.9 5.7 7.6 9.4 9.9 12.2 16.2 21.2
Two years later 8.0 8.7 10.1 12.7 14.1 17.2 21.4 26.6 -
Three years later 9.9 12.0 13.4 15.4 18.9 23.6 27.5 - -
Four years later 12.3 13.7 15.2 18.7 23.0 27.0 - - -
Five years later 13.5 14.6 17.5 21.6 25.0 - - - -
Six years later 14.2 15.9 19.7 22.8 - - - - -
Seven years later 15.3 17.9 20.6 - - - - - -
Eight years later 17.3 18.7 - - - - - - -
Nine years later 18.0 - - - - - - - -
This table does not present accident or policy year development data, which readers may be more accustomed to
analyzing. Conditions and trends that have effected development of the liability in the past may not necessarily
occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies
based on this table. There are no specific provisions for the effects of inflation or other factors which may cause a
future change in claim costs.
The company withdrew from the reinsurance assumed business in 1976; however, it remains involved with treaties
that cover certain risks which have had significant development industry-wide over the past several
years. Due to the nature of the assumed business, ultimate losses may, and often do, vary from current estimates.
See footnote 4(b) of the notes to the consolidated financial statements.
</TABLE>
(h) Reconciliation of Statutory to Generally Accepted Accounting Principles
(GAAP) reserves:
<TABLE>
<CAPTION>
Balance, December 31, as reported to For the Year Ended December 31,
Insurance Commissioner of the 1997 1996 1995
State of Wisconsin:
<S> <C> <C> <C>
- CIC $ 71,117,787 $ 47,458,573 $ 37,996,923
- CSIC - - -
Funds withheld from reinsurers, reclassified
to loss reserves on a GAAP basis 447,658 489,808 514,583
Reserve for return of disability premiums,
reclassified to loss reserves on a GAAP basis 18,686 14,820 26,625
GAAP adjustment to gross up reserves
for the effect of reinsurance 594 (225,367) 52,653
Other, net (112,387) (35,471) (6,700)
Balance, December 31, on a GAAP basis $ 71,472,338 $ 47,702,363 $ 38,584,084
</TABLE>
Item 2. Properties
Capitol Transamerica Corporation leases premises in the Pyare Square
building located at 4610 University Avenue, Madison, Wisconsin, 53705, as
follows:
Approximately 35,518 square feet occupying a portion of the 1st, 2nd,
9th and 10th floors and all of the 11th, 12th, 13th and 14th floors.
The term of the lease is from June 1, 1996 through May 31, 1999.
The Company also leases approximately 2,000 square feet of storage space
from the President of the Company in a personally owned warehouse at
terms as favorable as those available from unaffiliated third parties.
The Company also leases 200 square feet of office space in Las Vegas,
Nevada. the term of the lease is from November 1, 1996 to October 31,
1999.
Item 3. Legal Proceedings
Capitol Indemnity Corporation (CIC) is a defendant in certain lawsuits
involving complaints which demand damages and recoveries for claims and
losses allegedly related to risks insured by CIC. In the opinion of
management, such lawsuits are routine in that they result from the ordi-
nary course of business in the insurance industry. The reserves for losses
and loss adjustment expenses include management's estimates of the
probable ultimate cost of settling all claims involving lawsuits. Such
estimates are continually reviewed and updated. The reserves for losses
and loss adjustment expenses at December 31, 1997, are, in the opinion of
management, adequate to absorb claims arising from those routine legal
proceedings presently in process against the Company.
Item 4. Submission of Matters to a Vote of Shareholders
No matters were submitted to a vote of shareholders during the Company's
fourth fiscal quarter ended December 31, 1997.
Item 5. Market Information, Dividends and Other Information
On March 6, 1998, the approximate number of registered shareholders was 2,500.
CTC is publicly owned and traded on the National Over-the-Counter Market,
symbol CATA. The market price of the stock during 1997 was a low of
19 1/4 and a high of 28 1/8 with the equivalent of 1,768,556 shares traded.
Quarterly high and low quoted prices are obtained from the National Association
of Securities Dealers are illustrated below. The 1996 quotations are adjusted
for the December 31, 1996 3 for 2 stock split effected as a 50% dividend.
<TABLE>
<CAPTION>
1997 1996
Quarter High Low Dividends High Low Dividends
<S> <C> <C> <C> <C> <C> <C>
First 27 3/8 20 1/8 $.17 14 13 $.12
Second 27 1/2 19 1/4 .07 13 11/16 12 .07
Third 27 1/2 25 1/2 .07 15 1/2 12 5/16 .07
Fourth 28 1/8 21 .07 20 15/16 15 1/16 .07
Year 28 1/8 19 1/4 $.38 20 15/16 12 $.33
For the period January 1 through March 6, 1998, the high ask price was 22 1/4 and the low bid price
was 20. A regular cash dividend of $.07 per share was paid on March 27, 1998, to shareholders
of record on March 13, 1998.
Future dividend payments must be authorized by the Board of Directors and will be dependent on operating
results, capital requirements and the financial condition of the Company.
</TABLE>
Subsidiaries S.E.C. Form 10-K
Capitol Indemnity Corporation Copies of the Company's Annual
Capitol Specialty Insurance Corporation report filed with the SEC, in-
Capitol Facilities Corporation cluding exhibits, are available
by written request addressed to:
Independent Public Accountants
Paul J. Breitnauer
Ernst & Young LLP Vice President & Treasurer
111 East Kilbourn Avenue 4610 University Ave.
Milwaukee, Wisconsin 53202 Madison, Wisconsin 53705-0900
Transfer Agent and Registrar Annual Meeting
Firstar Trust Co. The Company's Annual Meeting
Corporate Trust Services will be held Monday, May 11,
615 East Michigan Street 1998, 4:00 PM at the
P.O. Box 2077 Marriot Inn - Madison West
Milwaukee, Wisconsin 53201 1313 John Q. Hammond Drive
Middleton, Wisconsin 53562
Common Stock
Listed: OTC
Quoted: NASD (CATA)
Item 6. FIVE YEAR CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Gross Premiums Written $ 99,507,846 $ 90,939,387 $ 70,878,492 $ 58,564,342 $ 50,346,528
Net Premiums Written $ 91,564,795 $ 89,243,325 $ 68,356,968 $ 56,651,941 $ 47,906,064
Premiums Earned $ 87,451,620 $ 77,347,319 $ 63,865,500 $ 52,461,456 $ 43,456,430
Net Investment Income 8,580,713 7,155,382 6,635,123 5,359,606 5,001,715
Realized Investment Gains (Losses) 15,370,384 8,468,911 3,587,323 (106,188) 4,145,701
Other Revenues 36,801 382,130 144,866 118,353 38,609
Total Revenues 111,439,518 93,353,742 74,232,812 57,833,227 52,642,455
Losses and Loss Adjustment Expenses Incurred 61,128,402 41,165,776 34,099,463 27,536,054 20,649,739
Underwriting and Other Expenses 28,587,186 26,680,657 21,497,664 17,883,570 15,963,957
Total Losses Incurred and Expenses 89,715,588 67,846,433 55,597,127 45,419,624 36,613,696
Income from Operations Before Income Taxes 21,723,930 25,507,309 18,635,685 12,413,603 16,028,759
Income Tax Expense 6,532,051 7,158,151 4,705,279 3,166,363 4,344,504
Consolidated Net Income $ 15,191,879 $ 18,349,158 $ 13,930,406 $ 9,247,240 $ 11,684,255
Weighted Average Number of Shares Outstanding
- Basic 11,151,428 11,077,501 11,049,660 11,012,621 10,937,043
Weighted Average Number of Shares Outstanding
- Diluted 11,285,751 11,315,758 11,190,198 11,184,566 11,086,117
Income Per Share - Basic $ 1.36 $ 1.66 $ 1.26 $ 0.84 $ 1.07
Income Per Share - Diluted $ 1.35 $ 1.62 $ 1.24 $ 0.83 $ 1.05
Total Cash Dividends Per Share $ 0.38 $ 0.33 $ 0.24 $ 0.27 $ 0.23
Consolidated Net Income and Cash Dividends Stated
as a Ratio to Beginning Shareholders' Equity 16.7% 23.8% 25.3% 18.6% 25.9%
Year End Financial Position:
Assets $286,682,275 $228,885,454 $176,730,156 $127,633,195 $117,346,301
Shareholders' Investment 139,342,141 116,581,883 92,653,880 67,979,174 65,648,667
Book Value Per Share $ 12.46 $ 10.50 $ 8.37 $ 6.15 $ 5.97
Shares Outstanding 11,178,882 11,103,297 11,068,161 11,032,433 10,978,988
Insurance Operating Ratios (Statutory Basis):
Losses and Loss Adjustment Expenses to
Net Premiums Earned 70.1% 53.5% 53.2% 52.3% 47.5%
Underwriting Expenses to Net Premiums Written 32.1% 33.5% 32.8% 32.4% 32.2%
Combined Ratio 102.2% 87.0% 86.0% 84.7% 79.7%
A. M. BEST Rating A+ A+ A+ A+ A+
Superior Superior Superior Superior Superior
Prior years' information has been restated to reflect the December 31, 1996 three-for-two stock split effected as a 50%
stock dividend, and the December 28, 1995 ten percent stock dividend.
</TABLE>
Item 7. 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 subsidiaries, both property-
casualty and fidelity-surety insurance. The property-casualty segment accounts
for approximately 70% of the business written while the fidelity-surety segement
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 in-
adequate rates, underwriting losses and, as a result, higher combined ratios.
The adequacy of premium rates is affected primarily by the severity and frequen-
cy 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 indus-
try, the trend of increasing price competition has continued as has the number
of significant natural disasters. This combination has resulted in a consider-
able 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 regulators 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-casualty insurance industry.
OPERATING RESULTS
As mentioned in the Overview, the property-casualty insurance industry is in a
downward cycle. However, despite a difficult year in which the Company
aggessively strengthened its reserves, mangement expects that trend of in-
creasing revenues and significant underwriting gains will continue in the
future. The expansion of coverages and entry into new geographic regions has
contributed to increased revenues, which when combined with prudent under-
writing standards should enable the Company to resume its upward trend in
profitability for our shareholders. Indeed, when the industry's cycle re-
verses, the Company will be in an excellent position to take advantage of
premium rate increases.
Gross premiums written during 1997 were $99,507,846, compared with $90,939,387
in 1996 and $70,878,492 in 1995.
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 in 1997 totaled $87,451,620, compared
with $77,347,319 and $63,865,500 in 1996 and 1995, respectively. The net unearn-
ed premium reserve was $47,411,849, $43,258,833 and $31,555,728 at each year-
end.
<TABLE>
<CAPTION>
1997 1996 1995
<S>
Gross Premiums Written $99,507,846 $90,939,387 $70,878,492
Reinsurance Ceded 7,943,050 1,696,062 2,521,524
Net Premiums Written $91,564,796 $89,243,325 $68,356,968
Net Premiums Earned $87,451,620 $77,347,319 $63,865,500
Net Unearned Premium Reserve $47,411,849 $43,258,833 $31,555,728
The large increase in ceded premiums in 1997 is due to a new reinsurance agreement entered into during the year.
CIC assumes and fully cedes dental capitation premiums while retaining a brokerage fee. The Company should not
incur any net losses from this business.
The Company's underwriting 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 state as a ratio of net
premiums written. The combined ratios were as follows:
<CAPTION>
Insurance Operating Ratios (Statutory Basis): 1997 1996 1995
<S> <C> <C> <C>
Losses and Loss Adjustment Expenses 70.1% 53.5% 53.2%
Underwriting Expenses 32.1% 33.5% 32.8%
Combined Ratios 102.2% 87.0% 86.0%
In 1997 the Company strengthened IBNR reserves by $14.5 million, which increased the loss ratio by 16.6%. Despite
this large adjustment, the Company's combined loss and expense ratio was still slightly below the projected industry
average for 1997 of 102.3%, and well below the industry average of 105.5% for the year 1996.
</TABLE>
REINSURANCE
The Company follows the customary practice of reinsuring with other companies,
e.g., 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
occurrences 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
The Company's fixed maturities and equity securities are classified as
available-for-sale and are carried at fair value. The unrealized gains and
losses, net of tax, are reported as a separate component of shareholders'
investment.
Interest and Dividend Income: Interest on fixed maturities is recorded as in-
come when earned and is adjusted for any amortization of purchase premium or
discount. Dividends on equity securities are recorded as income on ex-dividend
dates.
<TABLE>
<CAPTION>
Investments: 1997 1996 1995
<S> <C> <C> <C>
Invested Assets $245,644,042 $184,801,846 $149,216,723
Net Investment Income 8,580,713 7,155,382 6,635,123
Percent of Return to
Average Carrying Value 4.9% 5.1% 5.7%
Realized Gains 15,370,384 8,468,911 3,587,323
Change in Unrealized Gains $ 16,746,287 $ 12,672,783 $ 21,085,956
The net increase in unrealized gains of $16,746,287 for 1997 was comprised of a $123,135 decrease in fixed maturities and an
increase of $16,869,422 in equity securities.
Net investment income in 1997 amounted to $8,580,713, compared with $7,155,382 and $6,635,123 in 1996 and 1995, respectively.
Unrealized gains were $49,509,958, $32,763,674 and $20,090,891 at each respective year end.
</TABLE>
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 losses and loss adjustment expenses reflect the Company's best
estimate of the liability for the ultimate cost of reported claims and incurred
but not reported (IBNR) claims 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 losses and loss ad-
justment expenses were $71,472,338 at December 31, 1997 compared with
$47,702,363 at December 31, 1996. This increase is a combination of giving con-
sideration 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 claim 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 (85.7% in 1997, 80.7% in 1996 and 84.4% in
1995) of the Company's assets. Cash outflow can be unpredictable for two
reasons: first, a large portion of liabilities representing loss reserves have
uncertainty regarding settlement dates; and second, there is potential for
losses occurring either individually or in the aggregate. As a result, the Com-
pany maintains adequate short-term investment programs necessary to ensure the
availability of funds. The investment program is structured so that a forced
sale liquidation of fixed maturities should not be necessary during the course
of ordinary business involvement and activities. The Company has no material
capital expenditure commitments.
YEAR 2000
A significant issue facing not only the insurance industry but society as a
whole is potential problems related to the approaching year 2000. Older
computer programs were written using two digits rather than four to define the
applicable year. As a result, those computer programs may misinterpret a
date, using "00" as the year 1900 rather than year 2000.
During 1996 and 1997 the Company incurred approximately $1.8 million of ex-
penses in updating its mangement information system to alleviate potential
year 2000 problems. This process is substantially completed, with only
testing and peripheral adjustments remaining. The additional expense for the
testing and adjustments is expected to be approximately $600,000. As a re-
sult of these efforts, the Company is confident that the year 2000 will not
cause a significant disruption to its business.
The Company has also assessed the potential impact of year 200 related problems
that may be encountered by our agents and third parties, and determined that
any impact would not be material relative to the operations of the Company.
However, there can be no guarantee that actual results would not differ
materially from those anticipated.
Item 8. Financial Statements and Supplementary Data
Financial Statements
The financial statements filed by CTC in connection with this Annual
Report are consolidated financial statements which present all of the
operations of the parent company and its subsidiaries.
(1) Capitol Transamerica Corporation Consolidated Financial Statements:
(2) Report of independent auditors.
(3) Consolidated balance sheets - December 31, 1997 and 1996.
(4) Consolidated statements of income - for each of the three years
in the period ended December 31, 1997.
(5) Consolidated statements of shareholders' investment - for each of
the three years in the period ended December 31, 1997.
(6) Consolidated statements of cash flows - for each of the three
years in the period ended December 31, 1997.
(7) Notes to consolidated financial statements.
Item 9. Disagreements of Accounting and Financial Disclosures
None.
Item 10. Directors and Executive Officers of CTC
(a) Directors
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name (Age) Other Directorships, Business Expire at
Date of Original Election Principal Occupation Experience and Miscellaneous Information Annual Mtg. in:
Paul J. Breitnauer (58) Vice President and Treasurer of Mr. Breitnauer has been associated with 1999
1986 the Company; Senior Vice Presi- the insurance industry in various
dent & Treasurer of CIC, CSIC capacities since 1963.
and CFC, wholly-owned subsidi-
aries of the Company.
Sun Prairie, Wisconsin
George A. Fait (71) Chairman of the Board and Mr. Fait is a director of Bank One and 1997
1960 President of the Company and its has been associated with the insur-
wholly-owned subsidiaries; Di- ance industry in various capacities
rector of Bank One. since 1950.
Madison, Wisconsin
Larry Burcalow (56) Owner & President Mr. Burcalow has been Owner and President 1999
1997 Yahara Materials, Inc. of Yahara Materials, Inc. for over 30
Waunakee, Wisconsin years.
Michael J. Larson (56) Vice President Mr. Larson has been associated with the 1998
1991 American National Bank banking industry in various capacities
Madison, Wisconsin since 1965.
Reinhart H. Postweiler(68)Retired, formerly with Flad Mr. Postweiler is a Director of Bank One. 1999
1977 Affiliated Corporation; Director He is a member of the Wisconsin Society of
of Bank One, Madison, Wisconsin. Professional Engineers and the National
Society of Professional Engineers.
Kenneth P. Urso (63) Owner & Operator Mr. Urso has been in the insurance 1999
1997 Urso & Associates, LLC business for over 30 years.
Madison, Wisconsin
None of the above directors are related and there are no arrangements or understandings
between directors since each is acting solely in their described capacity. There have been
no events during the past five years which are material to the evaluation of the ability
and integrity of any director of CTC.
</TABLE>
Item 10. (continued)
(b) Executive Officers:
Chairman of the Board and President- George A. Fait (71 years of age)
Elected in 1960. Chairman of the Board and President - CIC, CSIC and
CFC, wholly-owned subsidiary companies.
Vice President and Treasurer - Paul J. Breitnauer (58 years of age)
Elected Treasurer in 1970 and Vice President in 1982. Senior Vice
President and Treasurer - CIC, CSIC and CFC.
Secretary - Virgiline M. Schulte (69 years of age)
Elected in 1988. Secretary - CIC, CSIC and CFC.
(c) Additional Executive Officers -
CIC & CSIC - Wholly-Owned Subsidiary Insurance Companies:
Vice President - P & C Claims Vice President - Personnel
Robert F. Miller (59 years of age) Virgiline M. Schulte (69 years
Elected in 1986. old) Elected in 1993.
Vice President - Agency Vice President- Data Processing
Joel G. Fait (39 years of age) Frank S. Zillner (36 years old)
Elected in 1993. Elected in 1993.
Vice President - Rating Corporate Counsel
Gerald A. Olson (53 years of age) Vacant
Elected in 1993.
Vice President - P & C Underwriting
William B. Hutchison (43 years of age)
Elected in 1993.
(d) Disclosure of Delinquent Filers
The section captioned "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Capitol Transamerica Corporation ("CTC")
Proxy Statement dated April 3, 1998 is incorporated herein by
reference.
Item 11. Executive Compensation and Transactions
The sections captioned "Compensation of Directors", "Report on Executive
Compensation" and "Executive Compensation Committee Report" in the CTC
Proxy Statement dated April 3, 1998 are incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The sections captioned "Principal Shareholders", "Option/SAR Exercised in
Last Fiscal Year" and "Compensation Plans" in the CTC Proxy Statement
dated April 3, 1998 are incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The section captioned "Compensation Committee Interlocks and Insider
Participation" and the three sections referenced in Item 11 above,
all included in the CTC Proxy Statement dated April 3, 1998, are in-
corporated herein by reference.
George Fait and Virgiline Schulte are brother and sister; Joel Fait is
George Fait's son and Frank Zillner is his son-in-law; none of the other
officers are related and there are no arrangements or understandings
between officers since each is acting solely in their described capacity.
There have been no events during the past five years which are material
to the evaluation or the ability and integrity of any executive officer
of the Company or its subsidiaries.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1 and 2. Financial statements and financial statement schedules
The following financial statements of Capitol Transamerica Corporation
and Subsidiaries are included in Item 8.
Consolidated balance sheets - December 31, 1997 and 1996.
Consolidated statements of income - for each of the three years
in the period ended December 31, 1997.
Consolidated statements of shareholders' investment - for each of
the three years in the period ended December 31, 1997.
Consolidated statements of cash flows - for each of the three
years in the period ended December 31, 1997.
Notes to consolidated financial statements.
The following financial statement schedules of Capitol Transamerica
Corporation and Subsidiaries are included in Item 14(d).
Schedule I Summary of Investments Other than Investments in
Related Parties
Schedule II Condensed Financial Information of Registrant - Parent
Company
Schedule III Supplementary Insurance Information
Schedule IV Reinsurance
Schedule VI Supplemental Information Concerning Property-Casualty
Insurance Operations
All other schedules required by Article 7 of Regulation S-K are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
(b) No Reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended December 31, 1997.
(c) Exhibits
None
(d) Financial Statement Schedules
Reference is made to the financial statement schedules above.
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CAPITOL TRANSAMERICA CORPORATION
By By
George A. Fait Paul J. Breitnauer
Chairmant of the Board, Vice President,
President and Director Treasurer and Director
By By
Virgiline M. Schulte Larry Burcalow
Secretary Director
By By
Michael J. Larson Reinhart H. Postweiler
Director Director
By
Kenneth P. Urso
Director
March 25, 1998
RESPONSIBILITY FOR FINANCIAL REPORTING
To The Shareholders and Board of Directors of Capitol Transamerica Corporation:
The Company has prepared the consolidated financial statements, related notes,
and other financial data appearing in this Annual Report. The statements were
developed using generally accepted accounting principles and policies considered
appropriate in the circumstances. They reflect, where applicable, management's
best estimates and judgements. The financial data also includes disclusures and
explanations which are relevant to an understanding of the financial affairs of
the Company.
To meet management's responsibility for financial reporting, internal control
systems and procedures are designed to provide reasonable assurances as to the
reliability of the financial records and compliance with corporate policy
throughout the organization.
Ernst & Young LLP, independent auditors, have audited the financial statements.
To express an opinion thereon, they review and evaluate the Company's internal
accounting controls and conduct such tests of the accounting records and other
auditing procedures as they deem necessary. The Board of Directors oversees the
Company's financial reporting through its Audit Committee, which regularly meets
with management representatives and jointly with the independent auditors, to
review accounting, auditing and financial reporting matters. A policy of busines
ethics is communicated annually to the Company's directors, officers and respon-
sible employees. The Company monitors compliance with the policy to help assure
that operations are conducted in a responsible and professional manner with a
committment to the highest standard of business conduct.
Paul J. Breitnauer
Vice President and Treasurer
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Capitol Transamerica Corporation:
We have audited the accompanying consolidated balance sheets of Capitol Trans-
america Corporation (the "Company") as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders equity, and cash flows
for the three years in the period ended December 31, 1997. Our audits also in-
cluded the financial statement schedules listed in the Index at Item 14(a).
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Capitol
Transamerica Corporation at December 31, 1997 and 1996, and the consolidated re-
sults of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Milwaukee, Wisconsin Ernst & Young LLP
February 27, 1998
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Assets
Investments (Notes (1)(b) and (2)):
Available-for-sale investment securities, at fair value
Fixed maturities (amortized cost $69,434,974 and $77,807,048 respectively) $ 74,071,516 $ 82,566,725
Equity securities:
Common stock, (cost $101,409,300 and $59,099,459, respectively) 145,208,469 86,569,214
Nonredeemable preferred stock, (cost $5,854,291 and
$5,346,938, respectively) 6,928,541 5,881,180
Investment real estate, at cost, net of depreciation 8,122,638 6,721,343
Short-term investments, at cost which approximate fair value (Note(2)(d) 11,312,878 3,063,384
Total Investments 245,644,042 184,801,846
Cash 1,202,548 364,994
Accrued investment income 1,707,692 1,684,940
Receivables from agents, insureds and others, less allowance
for doubtful accounts of $440,000 and $380,000, respectively 20,820,481 18,712,387
Balances due from reinsurers 122,916 1,033,058
Funds held by ceding reinsurers - 44,791
Deferred insurance acquisition costs (Note (1)(e)) 14,186,941 12,978,314
Prepaid reinsurance premiums 743,988 704,148
Due from securities brokers - 6,347,754
Income taxes recoverable 684,342 -
Other assets 1,569,325 2,213,222
Total Assets $286,682,275 $228,885,454
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<CAPTION>
1997 1996
Liabilities
<S> <C> <C>
Policy Liabilities and Accruals (Notes (1)(d), (3) and (4)):
Reserve for losses $ 48,570,173 $ 29,811,723
Reserve for loss adjustment expenses 22,902,165 17,890,640
Unearned premiums 47,411,849 43,258,833
Total Policy Liabilities and Accruals 118,884,187 90,961,196
Accounts payable 5,805,568 6,612,383
Dividends payable - 4,526
Due to securities brokers 5,318,372 474,281
Balances due to reinsurers 1,337,564 1,776,524
Accrued premium taxes 337,163 562,573
Income taxes payable - 1,870,252
Deferred income taxes 15,657,280 10,041,836
Total Other Liabilities 28,455,947 21,342,375
Total Liabilities 147,340,134 112,303,571
Commitments and contingent liabilities (Notes (4) and (8)) - -
Shareholders' Investment (Notes (6) and (7))
Common stock, $1.00 par value, authorized 15,000,000 shares,
issued 11,502,520 and 7,612,711, respectively 11,502,520 7,612,711
Common stock distributable, $1.00 par value, 3,806,355 shares - 3,806,355
Paid-in surplus 21,832,206 21,114,644
Net unrealized appreciation (depreciation) on securities carried at fair value
net of deferred taxes of $16,833,386 & $11,139,649, respectively(Notes(1)(b)&(2) 32,676,572 21,624,025
Retained earnings 73,732,118 62,761,654
Shareholders' investment before treasury stock 139,743,416 116,919,389
Treasury stock, 323,638 and 315,769 shares, respectively, at cost (401,275) (337,506)
Total Shareholders' Investment 139,342,141 116,581,883
Total Liabilities and Shareholders' Investment $286,682,275 $228,885,454
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
<CAPTION>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
<S> <C> <C>
Revenues:
Premiums earned (Note (1)(c)) $ 87,451,620 $ 77,347,319 $ 63,865,500
Net investment income (Note (2)(e)) 8,580,713 7,155,382 6,635,123
Realized investment gains (Notes (1)(b) and (2)) 15,370,384 8,468,911 3,587,323
Other revenues 36,801 382,130 144,866
Total Revenues 111,439,518 93,353,742 74,232,812
Losses and Expenses Incurred (Notes (1)(d), (3) and (4)):
Losses incurred 49,055,296 29,694,168 24,620,433
Loss adjustment expenses incurred 12,073,106 11,471,608 9,479,030
Underwriting, acquisition and insurance expenses (Note(10)) 28,458,021 29,136,689 22,218,510
Increase in deferred insurance acquisition costs (1,208,627) (3,749,446) (1,513,479)
Other expenses 1,337,792 1,293,414 792,633
Total Losses and Expenses Incurred 89,715,588 67,846,433 55,597,127
Income from operations before income taxes 21,723,930 25,507,309 18,635,685
Income tax expense (Note (5)) 6,532,051 7,158,151 4,705,279
Net Income $ 15,191,879 $ 18,349,158 $ 13,930,406
Income Per Share- basic (Note (1)(g)) $ 1.36 $ 1.66 $ 1.26
Weighted avg. number of shares outstanding-basic (Note (1)(g)) 11,151,428 11,077,501 11,049,660
Income Per Share- diluted (Note (1)(g)) $ 1.35 $ 1.62 $ 1.24
Weighted avg. number of shares outstanding-diluted (Note (1)(g)) 11,285,751 11,315,758 11,190,198
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
For the Years Ended December 31, 1995, 1996 and 1997
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 appreciation on available-for-sale
securities, net of deferred taxes - - - 13,916,731 - -
Stock options exercised 21,464 - 88,460 - - 8,918
Stock 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 depreciation 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 dividends 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 - - - - 15,191,879 -
Unrealized appreciation on available-for-sale
securities, net of deferred taxes - - - 11,052,547 - -
Stock options exercised 83,678 - 542,344 - - (63,769)
Proceeds from treasury share transactions - - 175,218 - - -
Stock dividends 3,806,131 (3,806,355) - - - -
Cash dividends declared - - - - (4,221,415) -
Balance, December 31, 1997 $11,502,520 $ - $21,832,206 $32,676,572 $73,732,118 $(401,275)
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
<CAPTION>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1996, 1995 and 1994
1997 1996 1995
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net Income $ 15,191,879 $ 18,349,158 $ 13,930,406
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,018,894 805,784 423,119
Realized investment (gains) losses (15,370,384) (8,468,911) (3,587,323)
Change in:
Deferred insurance acquisition costs (1,208,627) (3,749,446) (1,513,479)
Unearned premiums 4,153,016 11,703,105 4,761,479
Allowance for doubtful accounts receivable from agents 60,000 60,000 65,785
Accrued investment income (22,752) 33,314 (352,131)
Receivables from agents, insureds and others (2,168,094) (6,898,262) (2,595,686)
Balances due to/from reinsurers (284,774) (136,449) (154,893)
Reinsurance recoverable on paid and unpaid losses 755,956 (151,080) (547,078)
Funds held by ceding reinsurers 44,791 32,326 60,305
Income taxes payable/receivable (2,554,594) 1,980,343 371,620
Deferred income taxes (78,292) (68,247) (156,647)
Due to/from securities brokers 11,191,845 (6,028,431) (145,042)
Prepaid reinsurance premiums (39,840) 192,901 (270,011)
Other assets 339,684 (123,731) 294,732
Reserves for losses and loss adjustment expenses 23,769,975 9,118,279 11,108,761
Accounts payable (806,814) 2,250,075 448,636
Accrued premium taxes (225,410) 180,029 112,822
Net cash provided by operating activities 33,766,459 19,080,757 22,255,375
Cash flows provided by (used for) investing activities:
Proceeds from sales of available-for-sale investments 44,747,214 27,579,131 21,046,919
Purchases of available-for-sale investments (78,773,489) (49,010,584) (47,289,410)
Maturities of available-for-sale investments 5,064,056 6,917,920 6,447,108
Purchases of depreciable assets (477,992) (1,279,331) (683,115)
Net cash used for investing activities (29,440,211) (15,792,864) (20,478,498)
Cash flows provided by (used for) financing activities:
Cash dividends paid (4,226,165) (3,699,525) (2,546,264)
Stock options exercised 626,022 189,650 109,924
Net proceeds from sale (purchase) of treasury stock 111,449 (15,799) 8,918
Net cash used for financing activities (3,488,694) (3,525,674) (2,427,422)
Net (decrease) increase in cash 837,554 (237,781) (650,545)
Cash, beginning of year 364,994 602,775 1,253,320
Cash, end of year $ 1,202,548 $ 364,994 $ 602,775
Cash paid during the year for:
Income taxes $ 9,164,506 $ 5,292,665 $ 4,497,508
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Capitol Transamerica Corporation (the "Company") is an insurance holding
company which writes, through its subsidiaries, commercial insurance
coverages in 36 states. The property-casualty insurance coverages represent
approximately 70% of the Company's premiums written while fidelity-surety
coverages represent approximately 30% of the Company's premiums written. The
Company's products are marketed through independent agents located through-
out the United States.
The consolidated financial statements are presented in accordance with
generally accepted accounting principles. The preparation of financial
statements of insurance companies requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ significantly from those
estimates.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Capitol Indemnity Corpora-
tion ("CIC"), Capitol Specialty Insurance Corporation ("CSIC") and
Capitol Facilities Corporation ("CFC"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
(b) Investments
The Company classifies all of its fixed maturities and equity securi-
ties as available-for-sale. Accordingly, investments in fixed maturi-
ties and equity securities are reported at fair value, with unrealized
gains and losses reported in a separate component of shareholders'
investment, net of tax effect. The cost of fixed maturities is adjust-
ed for amortization of premiums and discounts to maturity. Fixed
maturities and equity securities deemed to have declines in value that
are other than temporary are written down through the statement of in-
come to carrying values equal to their estimated fair values.
Investment real estate is carried at cost net of accumulated deprecia-
tion of $240,551 and $203,830 as of December 31, 1997 and December
31, 1996, respectively.
Cost of investments sold is determined under the specific identifica-
tion method.
(c) Premiums
Premiums are recognized as revenue on a pro rata basis over the term
of the contracts.
(d) Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses, less related reinsurance and sub-
rogation recoverables, are provided for as claims are incurred. The
reserves for losses and loss adjustment expenses include: (1) the
accumulation of individual estimates for claims reported on direct
business prior to the close of the accounting period; (2) estimates
received from other insurers with respect to reinsurance assumed; (3)
estimates for incurred but not reported claims based on past experi-
ence modified for current trends; and (4) estimates of expenses for
investigating and settling claims based on past experience. The lia-
bilities recorded are based on estimates resulting from the continu-
ing review process. Differences between estimates and ultimate pay-
ments are reflected in expense for the period in which the estimates
are changed. Management believes that the reserves for losses and loss
adjustment expenses are adequate to meet obligations.
(e) Deferred Insurance Acquisition Costs
Insurance acquisition costs that vary with, and are directly related
to, the production of premiums(principally commissions, premium taxes
compensation and certain underwriting expenses) are deferred. Deferred
insurance acquisition costs are amortized to expense as the related
premiums are earned.
(f) Income Taxes
Deferred income taxes reflect the net tax effects of temporary dif-
ferences between the carrying amounts of assets and liabilities for
financial statement purposes and the amounts used for income tax
reporting.
(g) Income Per Share
Net income per share is computed by dividing net income by the weight-
ed average number of shares of stock outstanding during the year.
Wherever applicable, prior years' information has been restated to
reflect the December 31, 1996 three-for-two stock split effected as
a fifty percent stock dividend.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which
replaces the presentation of primary and fully diluted earnings per
share (EPS) with a presentation of basic and diluted EPS. The follow-
ing table sets forth the computation of basic and diluted EPS:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
<S> <C> <C> <C>
Numerator:
Consolidated net income $15,191,879 $18,349,158 $13,930,406
Denominator:
Denominator for basic EPS- weighted avg shares 11,151,428 11,077,501 11,049,660
Effect of dilutive securities- employee stock options 134,323 238,257 140,538
Denominator for diluted EPS 11,285,751 11,315,758 11,190,198
Basic EPS $ 1.36 $ 1.66 $ 1.26
Diluted EPS $ 1.35 $ 1.62 $ 1.24
(2)Investments
(a) The amortized cost and estimated fair value of fixed maturities and
equity securities are as follows:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Type of investment Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1997
Fixed maturities:
U.S. Government bonds $ 67,192 $ 4,883 $ - $ 72,075
State, municipal and political
subdivision bonds 68,651,060 4,592,852 (4,408) 73,239,504
Corporate bonds and notes 716,722 47,106 (3,891) 759,937
Total fixed maturities $ 69,434,974 $ 4,644,841 (8,299) $ 74,071,516
Equity securities:
Common stock $101,409,300 $ 46,194,740 $ (2,395,571) $145,208,469
Non-redeemable preferred stock 5,854,291 1,099,250 (25,000) 6,928,541
Total equity securities $107,263,591 $ 47,293,990 $ (2,420,571) $152,137,010
December 31, 1996
Fixed maturities:
U.S. Government bonds $ 578,852 $ 4,543 $ - $ 583,395
State, municipal and political
subdivision bonds 75,906,193 4,709,412 (24,724) 80,590,881
Corporate bonds and notes 1,322,003 71,962 (1,516) 1,392,449
Total fixed maturities $ 77,807,048 $ 4,785,917 $ (26,240) $ 82,566,725
Equity securities:
Common stock $ 59,099,459 $ 29,169,673 $ (1,699,918) $ 86,569,214
Non-redeemable preferred stock 5,346,938 605,522 (71,280) 5,881,180
Total equity securities $ 64,446,397 $ 29,775,195 $ (1,771,198) $ 92,450,394
(b) The amortized cost and estimated fair value of fixed maturities at December 31, 1997, by contractual maturity, is
shown below. Expected maturities will differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 360,235 $ 365,885
Due after one year through five years 3,846,593 3,985,566
Due after five years through 6,814,096 7,278,822
Due after ten years 58,414,050 62,441,243
Total $69,434,974 $74,071,516
(c) Realized gains (losses) and change in unrealized gains (losses) for the three years ended December 31, 1997,
1996 and 1995, are as follows:
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Realized gains (losses):
Fixed maturities
Gross gains $ 53,584 $ 88,664 $ 33,742
Gross losses (7,250) (36,388) (5,288)
Equity securities
Gross gains 15,323,242 8,454,726 3,558,869
Gross losses - (22,041) -
Other 808 (16,050) -
Net realized gains $15,370,384 $ 8,468,911 $ 3,587,323
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Change in unrealized gains (losses):
Fixed maturities $ (123,135) $(2,416,907) $ 6,492,201
Equity securities 16,869,422 15,089,690 14,593,755
Net change in unrealized gains 16,746,287 12,672,783 21,085,956
Effect of applicable deferred taxes (5,693,740) (4,308,746) (7,169,225)
Net increase in unrealized gains $11,052,547 $ 8,364,037 13,916,731
Following is a summary of total unrealized gains (losses) as of December 31, 1997, 1996 and 1995:
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Unrealized gains (losses):
Fixed maturities
Gross unrealized gains $ 4,644,841 $ 4,785,917 $ 7,273,048
Gross unrealized losses (8,299) (26,240) (96,462)
Equity securities
Gross unrealized gains 47,293,990 29,775,195 15,567,122
Gross unrealized losses (2,420,571) (1,771,198) (2,652,817)
Gross unrealized gains (losses) 49,509,961 32,763,674 20,090,891
Effect of applicable deferred taxes (16,833,389) (11,139,649) (6,830,903)
Net unrealized gains (losses) $32,676,572 $21,624,025 $13,259,988
</TABLE>
(d) The amortized cost of securities on deposit with insurance regulators
in accordance with statutory requirements was $3,689,284 on December
31, 1997 and $4,101,301 on December 31, 1996.
In connection with the runoff of the reinsurance assumed operations, CIC
has established a security trust fund agreement with a bank, consisting
of cash and securities in the amount of $832,192 at December 31, 1997
and $831,095 at December 31, 1996.
(e) Following is a summary of investment income from each category of
investments:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Fixed maturities $ 4,800,978 $ 4,936,902 $ 4,539,757
Equity securities 3,292,615 2,260,094 1,851,937
Investment real estate 2,340,878 1,280,669 751,162
Short-term 149,879 119,542 224,813
Total investment income 10,584,350 8,597,207 7,367,669
Investment expenses - real estate 1,361,092 945,777 549,674
Other investment expenses 401,994 419,201 138,016
Depreciation on real estate 240,551 76,847 44,856
Net investment income $ 8,580,713 $ 7,155,382 $ 6,635,123
</TABLE)
(f) The Company had investments in state, municipal and political subdivi-
sion bonds of $68,651,062 and $75,906,193 at December 31, 1997 and 1996,
respectively. Approximately 91% of these bonds were special assessment
revenue bonds and approximately 9% of these bonds were state and politi-
cal subdivision obligations at December 31, 1997 and 1996. The Company
monitors its exposure by investing its funds in accordance with guide-
lines set by the Company's investment committee. At December 31, 1997,
approximately 42% of the municipal bond portfolio consisted of securi-
ties of Wisconsin and Minnesota municipalities. No other state total
exceeded 10%.
(g) Fair values for fixed maturities and equity securities are determined
from quoted market prices where available, or are estimated using values
obtained from independent pricing services. Thinly traded fixed maturi-
ties are individually priced based upon year-end market conditions, type
of security, interest rate and maturity of the issue.
(3) Reserves for Losses and Loss Adjustment Expenses
The table below provides a reconciliation of the beginning and ending re-
serves for losses and loss adjustment expenses, net of reinsurance:
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance as of January 1, $47,702,363 $38,584,084 $27,475,323
Less reinsurance recoverables 225,367 (45,321) (12,363)
Net reserves 47,927,730 38,538,763 27,462,960
Incurred losses and loss adjustment expenses related to:
Current year 43,042,827 36,041,564 27,224,006
Prior years:
Direct losses 10,725,730 1,516,382 2,610,999
Direct loss adjustment expenses 2,141,661 1,901,083 2,810,145
Discontinued assumed reinsurance 5,218,184 1,706,747 1,454,313
Total prior years 18,085,575 5,124,212 6,875,457
Total incurred 61,128,402 41,165,776 34,099,463
Paid losses and loss adjustment expenses related to:
Current year 16,237,601 15,487,239 10,632,490
Prior years 21,160,666 16,245,614 12,285,492
Total paid 37,488,267 31,732,853 22,917,982
Other adjustments, net (96,121) (43,956) (105,678)
Net balance at December 31, 71,471,744 47,927,730 38,538,763
Plus reinsurance recoverables 594 (225,367) 45,321
Balance at December 31, $71,472,338 $47,702,363 $38,584,084
As explained in Note (1)(d), differences between estimates and ultimate payments are reflected in expense for the period
in which the estimates are changed. The Company continually reviews its reserves for losses and loss adjustment expenses
and the related reinsurance recoverables. As a result of the variability in these estimates, reserves have differed from
actual experience during 1997, 1996 and 1995. The estimates are based on past claim experience and consider current
claim trends as well as social and economic conditions. During 1997 it was determined that, due to increased claim de-
velopment on all lines of business, a substantial increase in incurred but no reported (IBNR) reserves was necessary.
The Company increased IBNR reserves by $10.0 million on direct business and $4.5 million on assumed reinsurance. The
Company continues to monitor factors that could affect future claim development. While the Company has recorded its
current best estimate of its reserves for losses and loss adjustment expenses, it is reasonably possible these estimates,
net of estimated reinsurance recoverables, may increase in the future. See Note 4(b) for discussion of assumed reinsurance.
</TABLE>
(4) Reinsurance
(a)Ceded
In 1997 and 1996, the Company generally reinsured losses in excess of
$1,000,000 with various other companies through reinsurance ceded con-
tracts. In 1995 and prior, the Company reinsured losses in excess of
$300,000 and $500,000. These arrangements provide for greater diversifi-
cation of business, allow the Company to control exposure to potential
losses arising from large risks, and provide additional capacity for
growth. Reinsurance ceded contracts do not relieve the Company from its
obligations to policyholders. The Company remains liable to its policy-
holders for the portion reinsured to the extent that any reinsurer does
not meet the obligations assumed under the reinsurance agreements. To
minimize its exposure to significant losses from reinsurer insolvencies,
the Company evaluates the financial condition of its reinsurers. Amounts
recoverable from reinsurers are estimated in a manner consistent with
the claim liability associated with the reinsured policies.
(b)Assumed- Discontinued
CIC was involved in providing reinsurance coverage by assuming a portion
of risks underwritten by other insurance companies and pools. Although
CIC withdrew from this reinsurnace business in 1976, its liability re-
mains for losses on policies written during the period in which it par-
ticipated as a reinsurer. The Company is involved with treaties that
cover certain risks which have had significant development industry-wide
over the past several years. The reinsurance assumed loss reserves are
based on current information available from the ceding companies and are
continually reviewed for accuracy and reasonableness. In 1997 the Com-
pany determined that additional IBNR reserves of $4.5 million were ne-
cessary to accrue for the estimated development on this business. Man-
agement is confident that the reserves of $9,320,722 at December 31,
1997 are adequate, but recognizes the uncertainty industry-wide concern-
ing these exposures. The Company has provided letters of credit relating
to reinsurance assumed of $503,585 at both December 31, 1997 and 1996.
(c)Assumed - Active
In 1997 the Company entered into a reinsurance program whereby CIC as-
sumed and then fully ceded $4.8 million in premiums during the year. The
Company received a brokerage fee on this business and is not likely to
incur any net losses.
Net written and earned premiums and losses and loss adjustment expenses
include reinsurance activity as follows:
<TABLE>
<CAPTION>
Written Premiums
1997 1996 1995
<S> <C> <C> <C>
Direct $94,690,638 $90,939,387 $70,878,492
Assumed 4,817,208 - -
Ceded (7,943,050) (1,696,062) (2,521,524)
Net premiums written $91,564,796 $89,243,325 $68,356,968
Earned Premiums
1997 1996 1995
Direct $90,537,623 $79,236,282 $66,117,013
Assumed 4,817,208 - -
Ceded (7,903,211) (1,888,963) (2,251,513)
Net premiums earned $87,451,620 $77,347,319 $63,865,500
Losses and Loss Adjustment Expenses
1997 1996 1995
Direct $57,314,915 $40,476,441 $33,320,640
Assumed - losses 5,162,726 1,606,731 1,355,570
Assumed - legal and audit 55,458 100,016 98,743
Ceded (1,404,697 (1,017,412) (675,490)
Net losses and loss adjustment expenses $41,165,776 $34,099,463 $27,536,054
</TABLE>
(5) Income Taxes
(a)The Company and its subsidiaries file a consolidated federal income tax
return and separate state franchise and premium tax returns as applicable.
(b)The components of income tax expense for the years 1997, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current expense:
Federal $ 6,055,422 $ 6,683,429 $ 4,393,537
State 554,922 559,972 468,388
Total current expense 6,610,344 7,243,401 4,861,925
Deferred expense(benefit):
Deferred insurance acquisition costs 410,933 1,274,812 514,583
Unearned premiums (279,696) (808,929) (305,420)
Discount on loss and loss adjustment
expense reserves (582,307) (315,137) (285,995)
Unpaid commissions 400,699 (211,404) 23,551
Other (27,922) (24,592) (103,365)
Total deferred benefit (78,293) (85,250) (156,646)
Income tax expense $ 6,532,051 $ 7,158,151 $ 4,705,279
(c)A reconciliation of the effective income tax rate, as reflected in the consolidated statements of income, to the
statutory federal income tax rate, is as follows:
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Statutory tax rate 35.0% 34.0% 34.0%
Municipal bond income, net of proration -6.5% -5.7% -6.9%
Dividend received exemption, net of proration -2.0% -1.9% -2.1%
State income tax expense, net of federal tax benefit 1.7% 1.5% 1.6%
Other, net 1.9% -0.8% -1.4%
Effective income tax rate 30.1% 28.1% 25.2%
(d)Significant components of the deferred tax liabilities and assets are as follows:
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
Deferred tax liabilities:
Deferred insurance acquisition costs $ 4,823,560 $ 4,412,627
Net unrealized gains on investment securities 16,833,386 11,139,649
Other 94,218 101,742
Total deferred tax liabilities 21,751,164 15,654,018
Deferred tax assets:
Unearned premium reserve discounting 3,173,414 2,893,719
Loss and loss adjustment expense reserve discounting 2,201,277 1,618,970
Unpaid commissions 355,115 755,815
Salvage and subrogation reserve discounting - 214,478
Other 364,078 129,200
Total deferred tax assets 6,093,884 5,612,182
Net deferred tax (liability) asset $(15,657,280) $(10,041,836)
</TABLE>
(6) Common Stock Options
The company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees' (APB 25) and related Interpreta-
tions in accounting for its stock options. Under APB 25, since the exer-
cise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recog-
nized. Had the company elected the fair value approach required under
FASB 123, "Accounting for Stock-Based Compensation," net income and earn-
ings per share would not be materially different for the years 1997, 1996
and 1995.
The Company's 1993 Stock Option Plan has authorized the grant of options
for up to 1,072,500 shares of the Company's common stock. All options
granted have a five year term and become fully vested at the end of four
years. Stock options available to be granted in the future equal 776,999
shares at December 31, 1997.
A summary of the Company's stock activity, and related information for the
years ended December 31 follows:
<TABLE>
<CAPTION> 1997 1996
Weighted Average Weighted Average
Options Excercise-Price Options Excercise-Price
<S> <C> <C> <C> <C>
Outstanding, beginning of year 327,123 $ 10.30 238,910 $ 7.30
Granted 5,700 22.44 112,319 14.40
Exercised (83,678) 7.48 (14,106) 5.40
Forfeited (12,034) 10.06 (10,000) 9.50
Outstanding, end of year 237,111 $ 11.80 327,123 $ 10.30
1995
Weighted Average
Options Exercise Price
Outstanding, beginning of year 175,552 $ 5.30
Granted 118,140 9.20
Exercised (35,416) 3.10
Forfeited (19,366) 8.60
Outstanding, end of year 238,910 7.30
Options currently exercisable at December 31, 1997 were 94,153. The weighted average remaining exercise
period for all outstanding options as of December 31, 1997 was 2.9 years. Exercise prices for
options outstanding as of December 31, 1997 ranged from $2.42 to $22.44 with 88% of these options having
exercise prices between $8.50 and $14.50.
</TABLE>
(7) Statutory Reporting
(a)The financial statements of the insurance subsidiaries have been prepared
in accordance with generally accepted accounting principles, which differ
in certain respects from accounting practices prescribed or permitted by
insurance regulatory authorities (statutory basis). The statutory capital
and surplus and net income of the insurance subsidiaries as reported to
state regulatory authorities, were as follows:
<TABLE>
<CAPTION>
Policyholders' Surplus As Of December 31,
1997 1996 1995
<S> <C> <C> <C>
Capitol Indemnity Corporation $109,324,111 $86,880,871 $62,618,547
Capitol Specialty Insurance Corporation 6,437,879 6,561,248 5,907,094
Total $115,761,990 $93,442,119 $68,525,641
<CAPTION>
Net Income for the Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Capitol Indemnity Corporation $13,162,055 $13,566,036 $11,762,554
Capitol Specialty Insurance Corporation 297,036 285,640 238,538
Total $13,459,091 $13,851,676 $12,001,092
The 1997 data above for CIC reflects a $3.5 million increase in reinsurance assumed reserves. This
increase was in response to an actuarial review of the Company's reserves completed subsequent to
issuance of CIC's statutory filings.
</TABLE>
(b)CIC is required by the Insurance Commissioner of the State of Wisconsin
to maintain a minimum compulsory surplus (surplus as regards policyhold-
ers) of 25% of net premiums written during the preceeding twelve months.
As of December 31, 1997, the amount of compulsory surplus required to be
maintained by CIC was approximately $22,854,463.
(c)State insurance regulations limit the transfer of assets, including divi-
dends, from insurance subsidiaries to the Company without regulatory
approval.
(8) Contingent Liabilities
CIC is a defendant in certain lawsuits involving complaints which demand
damages and recoveries for claims and losses allegedly related to risks in-
sured by CIC. In the opinion of management, such lawsuits are routine in
that they result from the ordinary course of business in the insurance in-
dustry. The reserves for losses and loss adjustment expenses include manage-
ment's estimates of the probable ultimate cost of settling all losses in-
volving lawsuits. See Notes (1)(d), (3) and (4).
(9) Employee Benefit Plans
The Company has a defined contribution benefit plan (the Plan) in which all
qualified employees are eligible to participate. The Plan incorporates a
contributory feature under Section 401(k) of the Internal Revenue Code
allowing employees to defer portions of their income through contributions
to the Plan. The Company's annual contribution to the Plan is 150% of the
first $1,500 of each participant's contribution during the plan year. The
Company made contributions of $192,738, $165,397 and $147,872 in 1997,
1996 and 1995, respectively.
The Company also has an Employee Stock Ownership Plan in which all quali-
fied employees are eligible to participate. The plan provides for discre-
tionary employer contributions of shares of Company stock or cash to pur-
chase shares of Company stock. The Company made contributions of $100,103,
$120,500 and $89,000 in 1997, 1996 and 1995, respectively.
(10)Underwriting, Acquisition and Insurance Expenses
A summary of underwriting, acquisition and insurance expenses incurred
during the years ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net commissions $19,066,258 $20,629,905 $14,791,800
Salaries and other compensation 4,163,019 3,714,706 3,423,152
Other expenses 5,081,803 4,792,078 4,003,558
Total costs 28,311,080 29,136,689 22,218,510
Increase in deferred insurance acquisition costs (1,208,627) (3,749,446) (1,513,479)
Total underwriting, acquisition and insurance expenses $27,102,453 $25,387,243 $20,705,031
Substantially all insurance contracts written by CIC are for a term of one year or less and deferred insurance acquisition
costs are amortized over the same term. The amount of deferred insurance costs amortized was $26,141,226, $22,801,709
and $18,611,260 in 1997, 1996 and 1995, respectively.
</TABLE>
(11)Line of Credit
The Company has a line of credit of $10,000,000. There were no borrowings
under the line of credit in 1997.
(12)Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997 (Reported)
First Second Third Fourth Total
<S> <C> <C> <C> <C> <C>
Revenues $22,860,193 $26,586,331 $26,904,980 $35,088,014 $111,439,518
Losses incurred and expenses 17,435,851 20,016,573 19,765,370 32,497,794 89,715,588
Net income 3,987,337 4,567,205 4,937,578 1,699,759 15,191,879
Net income per share- basic $ 0.36 $ 0.41 $ 0.44 $ 0.15 $ 1.36
Net income per share- diluted $ 0.35 $ 0.41 $ 0.44 $ 0.15 $ 1.35
Dividends per share $ 0.17 $ 0.07 $ 0.07 $ 0.07 $ 0.38
A year-end analysis of operations determined that a substantial increase in IBNR reservs was necessary in
the fourth quarter. It was also determined that there were certain timing differences that were not recorded
appropriately throughout the year. As a result, the Company has restated quarterly revenues and losses as follows:
For the Year Ended December 31, 1997 (Restated)
First Second Third Fourth Total
<S> <C> <C> <C> <C> <C>
Revenues $22,860,193 $23,561,331 $28,429,980 $36,588,014 $111,439,518
Losses incurred and expenses 20,385,851 22,966,573 22,715,370 23,647,794 89,715,588
Net income 2,040,337 623,705 3,997,078 8,530,759 15,191,879
Net income per share- basic $ 0.18 $ 0.06 $ 0.36 $ 0.76 $ 1.36
Net income per share- diluted $ 0.18 $ 0.06 $ 0.35 $ 0.76 $ 1.35
Dividends per share $ 0.17 $ 0.07 $ 0.07 $ 0.07 $ 0.38
For the Year Ended December 31, 1996
First Second Third Fourth Total
Revenues $19,021,237 $21,670,439 $23,340,606 $29,321,460 $93,353,742
Losses incurred and expenses 14,535,158 15,846,535 17,503,741 19,960,999 67,846,433
Net income 3,279,962 4,152,417 4,308,133 6,608,646 18,349,158
Net income per share- basic $ 0.30 $ 0.38 $ 0.39 $ 0.59 $ 1.66
Net income per share- duiluted $ 0.29 $ 0.37 $ 0.38 $ 0.58 $ 1.62
Dividends per share $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.28
SCHEDULE I
CAPITOL TRANSAMERICA CORPORATION
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 1997
(Consolidated)
</TABLE>
<TABLE>
<CAPTION>
Amount at
Which Shown
Fair in Balanc
Type of Investment Cost Value Sheet
<S> <C> <C> <C>
Fixed maturity securities, available-for-sale:
Bonds:
United Stated Government and government
agencies and authorities $ 67,192 $ 72,075 $ 72,075
State, municipalities, and political subdivisions 68,651,060 73,239,504 73,239,504
All other corporate bonds 716,722 759,937 759,937
Total 69,434,974 74,071,516 74,071,516
Equity securities, available-for-sale:
Common stocks:
Public utilities 2,065,856 1,983,808 1,983,808
Banks, trusts, and insurance companies 59,684,557 96,406,275 96,406,275
Industrial, miscellaneous, and all other 39,658,890 46,818,386 46,818,386
Nonredeemable preferred stocks 5,854,291 6,928,541 6,928,541
Total 107,263,591 152,137,010 152,137,010
Real estate, net of depreciation 8,122,638 8,122,638
Short-term investments 11,312,878 11,312,878
Total Investments $196,134,081 226,208,526 $245,644,042
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CAPITOL TRANSAMERICA CORPORATION
(Parent Company)
<CAPTION>
CONDENSED BALANCE SHEETS December 31,
Assets 1997 1996
<S> <C> <C>
Investments $ 9,925,434 $ 7,588,878
Cash 10,461 31,690
Accrued investment income 45,340 54,197
Investment in subsidiaries 128,967,449 107,873,422
Other assets 1,416,571 2,368,988
Total assets $140,365,255 $117,917,084
Liabilities and shareholders' equity
Liabilities:
Accounts payable $ 40,717 $ 336,381
Dividends payable - 4,526
Income taxes payable 5,461 120,287
Deferred income taxes 976,936 874,007
Total liabilities 1,023,114 1,335,201
Shareholders' equity:
Common stock 11,502,520 11,419,066
Additional paid-in-capital 21,656,988 21,114,644
Unrealized appreciation (depreciation) on available-for-
sale securities, net of deferred taxes 1,896,403 1,696,601
Retained earnings (including undistributed earnings of
subsidiaries of $102,271,184 and $81,151,740, respectively)104,687,505 82,689,078
139,743,416 116,919,389
Less treasury stock, at cost (401,275) (337,506)
Total shareholders' equity 139,342,141 116,581,883
Total liabilities and shareholders' equity $140,365,255 $117,917,084
December 31,
STATEMENTS OF INCOME 1997 1996 1995
<S> <C> <C> <C>
Dividends received from subsidiaries $ 4,500,000 $ 4,200,000 $ 3,000,000
Management fees received from subsidiaries 1,768,789 1,515,478 1,466,553
Investment income 270,678 272,035 253,103
Realized investment gains 236,914 448,156 18,255
Other income 14,577 646 24,138
Total Income 6,790,958 6,436,315 4,762,049
Administrative expenses 1,371,392 1,363,770 1,449,273
Net income before tax and equity in undistributed
net income of subsidiaries 5,419,566 5,072,545 3,312,776
Income tax expense 238,511 220,197 26,324
Net income of before equity in undistributed
net income of subsidiaries 5,181,055 4,852,348 3,286,452
Equity in undistributed net income of
subsidiaries, net of dividends paid 10,010,824 13,496,810 10,643,954
Net Income $15,191,879 $18,349,158 $13,930,406
The accompanying condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto of Capitol Transamerica Corporation.
SCHEDULE II
(continued)
<CAPTION>
CAPITOL TRANSAMERICA CORPORATION
(Parent Company)
December 31,
STATEMENTS OF CASH FLOWS 1997 1996 1995
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net income $15,191,879 $18,349,158 $13,930,406
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 778,343 728,940 378,263
Realized investment gains (236,914) (448,156) (18,255)
Change in:
Equity in net income of subsidiaries (10,010,824) (13,496,810) (10,643,954)
Other assets 671,601 (488,710) (74,752)
Other liabilities (412,478) (189,618) 273,391
Net cash provided by operating activitities 5,981,607 4,454,804 3,845,099
Cash flows provided by (used for) investing activities:
Proceeds from investments sold/matured 471,238 1,091,372 1,070,493
Purchases of investments (2,276,930) - (1,740,750)
Purchase of depreciable assets (477,992) (1,279,331) (683,115)
Net cash used for investing activitities (2,283,684) (187,959) (1,353,372)
Cash flows provided by (used for) financing activities:
Cash dividends paid (4,281,405) (3,731,375) (2,568,259)
Capital contribution to subsidiaries - (700,000) (20,000)
Stock options exercised 626,022 189,650 109,924
Net proceeds from sale (purchase) of treasury stock (63,769) (15,799) 8,918
Net cash used for financing activitities (3,719,152) (4,257,524) (2,469,417)
Net increase (decrease) in cash (21,229) 9,231 22,310
Cash, beginning of year 31,690 22,369 59
Cash, end of year $ 10,461 $ 31,690 $ 22,369
Cash paid during the year for:
Income taxes $ 175,400 $ 48,761 $ 88,077
Interest - 51,417 -
The accompanying condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto of Capitol Transamerica Corporation.
SCHEDULE III
CAPITOL TRANSAMERICA CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION
<CAPTION>
December 31,
Deferred Future Policy
Policy Benefits, Losses, Other
Acquisition Claims, and Unearned Policyholde
Segment Costs Loss Expense Premiums Funds
<S> <C> <C> <C> <C>
1997
Property-casualty
insurance $14,186,941 $71,472,338 $47,411,849 $ -
1996:
Property-casualty
insurance $12,978,314 $47,702,363 $43,258,833 $ -
1995:
Property-casualty
insurance $ 9,228,868 $38,584,084 $31,555,728 $ -
<CAPTION>
Year ended December 31
Benefits, Amortization of
Net Claims, Losses, Deferred Policy Other
Premium Investment and Settlement Acquisition Operating Premiums
Sement Revenue Income Expenses Costs Expenses Written
<S> <C> <C> <C> <C> <C> <C>
1997
Property-casualty
insurance $87,451,620 $ 8,580,713 $61,128,402 $26,141,226 $ 1,337,792 $99,507,846
1996:
Property-casualty
insurance $77,347,319 $ 7,155,382 $41,165,776 $22,801,709 $ 1,293,414 $90,939,387
1995:
Property-casualty
insurance $63,865,500 $ 6,635,123 $34,099,463 $18,611,260 $ 792,633 $70,878,492
SCHEDULE IV
CAPITOL TRANSAMERICA CORPORATION
REINSURANCE
For The Years Ended December 31, l997, l996 and l995
<CAPTION>
Assumed Percentage
Gross Ceded to From Assumed of Amount
Premiums Other Other From Net Assumed
Written Companies Companies Affiliates Amount To Net
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Premiums Written:
Accident and Health insurance $ 273,106 $ 4,817,208 $ 2,406,951 $ 2,410,257 $ 273,106 1,763.9%
Property & casualty and
fidelity & surety insurance 94,417,533 3,125,843 - - 91,291,690 -
Total premiums written $94,690,639 $ 7,943,051 $ 2,406,951 $ 2,410,257 $91,564,796 5.3%
December 31, 1996
Premiums Written:
Accident and Health insurance $ 238,615 $ - $ - $ - $ 238,615 -
Property & casualty and
fidelity & surety insurance 90,700,772 $ 1,696,062 $ - $ - $89,004,710 -
Total premiums written $90,939,387 $ 1,696,062 $ - $ - $89,243,325 -
December 31, 1995
Premiums Written:
Accident and Health insurance $ 222,137 $ - $ - $ - $ 222,137 -
Property & casualty and
fidelity & surety insurance 70,656,355 $ 2,521,524 $ - $ - $68,134,831 -
Total premiums written $70,878,492 $ 2,521,524 $ - $ - $68,356,968 -
SCHEDULE VI
CAPITOL TRANSAMERICA CORPORATION
SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
December 31, l997
<CAPTION>
As of December 31,
BALANCE SHEET DATA: 1997 1996
<S> <C> <C>
Deferred insurance acquisition costs $14,186,941 $12,978,314
Outstanding loss and loss adjustment expense reserves 71,472,338 47,702,363
Discount deducted from reserves - -
Unearned premiums $47,411,849 $43,258,833
<CAPTION>
INCOME STATEMENT DATA: Year Ended
1997 1996 1995
<S> <C> <C> <C>
Earned premiums $87,451,620 $77,347,319 $63,865,500
Net investment income 8,580,713 7,155,382 6,635,123
Incurred losses and loss adjustment
expenses related to:
Current year 43,042,827 36,041,564 27,244,006
Prior years 18,085,575 5,124,212 6,875,457
Amortization of deferred policy
acquisition costs 26,141,2269 22,801,709 18,611,260
Paid claims and claim adjustment
expenses 99,507,846 31,732,853 22,917,982
Gross premiums written $99,507,846 $90,939,387 $70,878,492
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 74071516
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 145208469
<MORTGAGE> 0
<REAL-ESTATE> 8122638
<TOTAL-INVEST> 245644042
<CASH> 1202548
<RECOVER-REINSURE> 122916
<DEFERRED-ACQUISITION> 14186941
<TOTAL-ASSETS> 286682275
<POLICY-LOSSES> 48570173
<UNEARNED-PREMIUMS> 47411849
<POLICY-OTHER> 22902165
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 11502520
<OTHER-SE> 128240896
<TOTAL-LIABILITY-AND-EQUITY> 286682275
87451620
<INVESTMENT-INCOME> 8580713
<INVESTMENT-GAINS> 15370384
<OTHER-INCOME> 36801
<BENEFITS> 61128402
<UNDERWRITING-AMORTIZATION> 27249394
<UNDERWRITING-OTHER> 1337792
<INCOME-PRETAX> 21723930
<INCOME-TAX> 6532051
<INCOME-CONTINUING> 15191879
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15191879
<EPS-PRIMARY> 1.36
<EPS-DILUTED> 1.35
<RESERVE-OPEN> 47702363
<PROVISION-CURRENT> 43042827
<PROVISION-PRIOR> 18085575
<PAYMENTS-CURRENT> 16327601
<PAYMENTS-PRIOR> 21160666
<RESERVE-CLOSE> 71472338
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
