We are submitting this amended 10Q due to the ommission of one item ($43,235)
from our balance sheet as of June 30, 1998.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 1998 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 (20 5/8) and low price (20 1/2), the
aggregate market value of voting stock held by non-affiliates of the registrant
as of June 30, 1998 was approximately $230,649,830.
Indicate the number of shares of each of the issuer's class of common stock, as
of the latest practicable date:
At June 30, 1998
Common Stock, $1.00 Par Value;
Issued: 11,522,605
Outstanding: 11,217,013
Total Pages: 21
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Part I
Financial Information Page
Consolidated Financial Statements 3 - 7
Notes to Consolidated Financial Statements 8 - 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10 - 12
Condensed Statutory Financial
Statements of Insurance Subsidiaries 13
Part II
Other Information
Other Disclosures 15
Officers and Directors 16
Signatures 17
Exhibit 1 (Press Release) 18 - 21
2
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
(Restated)
<S> <C> <C> <C>
ASSETS
Investments:
Available-for-sale investment securities, at fair value
U.S. Government bonds (amortized cost $54,012, $67,192
and $573,240, respectively) $ 58,695 $ 72,075 $ 577,233
State, municipal and political subdivision bonds (amortized
cost $66,334,009, $68,651,060 and $67,302,035, respectively) 70,602,600 73,239,504 71,890,710
Corporate bonds and notes (amortized cost $818,174,
$716,722 and $1,126,919, respectively) 867,489 759,937 1,213,451
Equity securities:
Common stock (cost $110,607,273, $101,409,300 and
$80,917,488, respectively) 148,727,611 145,208,469 119,749,118
Nonredeemable preferred stock (cost $6,269,703, $5,854,291
and $5,866,216, respectively) 8,367,001 6,928,541 6,780,177
Investment real estate, at cost, net of depreciation 8,695,480 8,122,638 7,191,665
Short-term investments, at cost which
approximates fair value 5,948,642 11,312,878 999,745
Total Investments 243,267,518 245,644,042 208,402,099
Cash 590,537 1,202,548 545,506
Accrued investment income 1,721,169 1,707,692 1,668,678
Receivables from agents, insureds and others, less allowance for
doubtful accounts of $470,000, $440,000 and $410,000, respectively 21,621,406 20,820,481 22,769,318
Balances due from reinsurers 259,811 122,916 144,800
Funds held by ceding reinsurers 43,235
Income taxes recoverable - 684,342 3,043,511
Deferred insurance acquisition costs 13,797,429 14,186,941 13,414,263
Prepaid reinsurance premiums 373,979 743,988 619,301
Due from securities brokers 5,211,626 - -
Other assets 2,054,910 1,569,325 1,611,023
Total Assets $288,941,620 $286,682,275 $252,218,499
</TABLE>
3
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31, June 30,
1998 1997 1997
(Restated)
<S> <C> <C> <C>
LIABILITIES
Policy liabilities and accruals:
Reserve for losses $ 51,238,825 $ 48,570,173 $ 37,548,444
Reserve for loss adjustment expenses 23,125,685 22,902,165 18,837,286
Unearned premiums 46,264,452 47,411,849 47,695,377
Total Policy Liabilities and Accruals 120,628,962 118,884,187 104,081,107
Accounts payable 5,782,049 5,805,568 7,390,078
Due to securities brokers 936,828 5,318,372 -
Balances due to reinsurers 669,888 1,337,564 1,699,018
Accrued premium taxes 176,335 337,163 160,511
Income taxes payable 1,497,986 - -
Deferred income taxes 13,942,208 15,657,280 14,195,451
Total Other Liabilities 23,005,294 28,455,947 23,445,058
Total Liabilities 143,634,256 147,340,134 127,526,165
SHAREHOLDERS' INVESTMENT
Common stock, $1.00 par value, authorized 15,000,000 shares,
issued 11,522,605, 11,502,520 and 11,471,850, respectively 11,522,605 11,502,520 11,471,850
Paid-in surplus 22,136,114 21,832,206 21,503,620
Net unrealized appreciation on investment securities carried at
fair value, net of deferred taxes of $15,143,679, $16,833,386
and $15,104,429, respectively 29,396,546 32,676,572 29,320,362
Retained earnings 82,722,142 73,732,118 62,749,762
Shareholders' investment before treasury stock 145,777,407 139,743,416 125,045,594
Treasury stock, 305,592, 323,638 and 316,448 shares,
respectively, at cost (470,043) (401,275) (353,260)
Total Shareholders' Investment 145,307,364 139,342,141 124,692,334
Total Liabilities and Shareholders' Investment $288,941,620 $286,682,275 $252,218,499
Book Value Per Share $ 12.95 $ 12.46 $ 11.18
Shares Outstanding 11,217,013 11,178,882 11,155,402
</TABLE>
4
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
For the Six Months For the Three Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
(Restated) (Restated)
<S> <C> <C> <C> <C>
REVENUES
Premiums earned $ 44,814,531 $ 41,886,245 $ 22,566,270 $ 21,525,775
Net investment income 4,582,773 4,119,867 2,286,942 1,972,565
Realized investment gains 7,637,647 379,060 6,741,095 33,366
Other revenues 48,908 36,352 21,963 29,625
Total Revenues 57,083,859 46,421,524 31,616,270 23,561,331
LOSSES AND EXPENSES INCURRED
Losses incurred 22,985,036 23,247,375 11,551,728 12,551,564
Loss adjustment expenses incurred 3,959,518 4,430,344 2,329,743 2,287,747
Underwriting, acquisition and
insurance expenses 14,270,964 15,465,869 7,459,669 8,418,457
Decrease (Increase) in deferred
insurance acquisition costs 389,512 (435,949) (180,267) (612,235)
Other expenses 687,184 644,785 344,016 321,040
Total Losses and Expenses Incurred 42,292,214 43,352,424 21,504,889 22,966,573
Income from operations before
income taxes 14,791,645 3,069,100 10,111,381 594,758
Income tax expense (benefit)
Current 4,364,358 216,223 2,947,335 (360,446)
Deferred (131,442) 188,835 65,858 331,499
4,232,916 405,058 3,013,193 (28,947)
Net Income $ 10,558,729 $ 2,664,042 $ 7,098,188 $ 623,705
INCOME PER SHARE - BASIC $ 0.94 $ 0.24 $ 0.63 $ 0.06
Weighted Avg # of Shares Outstanding-Basic 11,179,758 11,110,549 11,179,758 11,110,549
INCOME PER SHARE - DILUTED $ 0.94 $ 0.24 $ 0.63 $ 0.06
Weighted Avg # of Shares Outstanding-Diluted 11,243,474 11,260,293 11,243,474 11,260,293
5
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS INVESTMENT
<CAPTION>
Net 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, 1996 $ 6,899,060 $ 689,545 $20,949,100 $13,259,988 $51,177,894 $ (321,707)
Net income - - - - 18,349,158 -
Unrealized appreication 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)
Net income - - - - 10,558,729 -
Unrealized depreciation on available-for
sale securities, net of deferred taxes - - - (3,280,026) - -
Stock options exercised 20,085 - 97,988 - - (68,768)
Proceeds from treasury share transactions - - 205,920 - - -
Cash dividends declared - - - - (1,568,705) -
Balance, June 30, 1998 $11,524,002 $ - $22,136,114 $29,396,546 $82,722,142 $ (470,043)
6
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
June 30, December 31, June 30,
1998 1997 1997
Cash flows provided by operating activities: (Restated)
<S> <C> <C> <C>
Net Income $10,558,729 $ 15,191,879 $ 2,664,042
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 547,904 1,018,894 456,530
Realized investment gains (7,637,647) (15,370,384) (379,060)
Change in:
Deferred insurance acquisition costs 389,512 (1,208,627) (435,949)
Unearned premiums (1,147,397) 4,153,016 4,436,544
Allowance for doubtful accounts receivable from agents 30,000 60,000 30,000
Accrued investment income (13,477) (22,752) 16,262
Receivables from agents, insureds and others (830,925) (2,168,094) (4,086,931)
Balances due to/from reinsurers 112,629 (284,774) 11,772
Reinsurance recoverable on paid and unpaid losses (917,200) 755,956 797,471
Funds held by ceding reinsurers (43,235) 44,791 46,300
Income taxes payable 2,288,408 (2,554,594) (4,913,763)
Deferred income taxes (131,445) (78,292) 188,835
Due to/from securities brokers (9,593,170) 11,191,845 5,873,473
Prepaid reinsurance premiums 370,009 (39,840) 84,847
Other assets (385,812) 339,684 379,385
Reserve for losses and loss adjustment expenses 2,892,172 23,769,975 8,683,367
Accounts payable (23,518) (806,814) 777,696
Accrued premium taxes (160,828) (225,410) (402,062)
Net cash provided by operating activities (3,695,291) 33,766,459 14,228,759
Cash flows provided by (used for) investing activities:
Proceeds from sales of available-for-sale investments 25,093,983 44,747,214 12,455,931
Purchases of available-for-sale investments (22,412,160) (78,773,489) (26,273,105)
Maturities of available-for-sale investments 2,201,620 5,064,056 2,167,542
Purchase of depreciable assets (486,682) (477,992) (144,160)
Net cash used for investing activities 4,396,761 (29,440,211) (11,793,792)
Cash flows provided by (used for) financing activities:
Cash dividends paid (1,568,706) (4,226,165) (2,680,685)
Stock options exercised 323,993 626,022 441,984
Net proceeds from sale of treasury stock (68,768) 111,449 (15,754)
Net cash used for financing activities (1,313,481) (3,488,694) (2,254,455)
Net increase (decrease) in cash (612,011) 837,554 180,512
Cash, beginning of period 1,202,548 364,994 364,994
Cash, end of period $ 590,537 $ 1,202,548 $ 545,506
Cash paid during the year for:
Income taxes $ 2,182,031 $ 9,164,506 $ 5,130,000
</TABLE>
7
CAPITOL TRANSAMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(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, 1997, and the Consolidated Statement
of Cash Flows as of December 31, 1997, 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.
A 1997 year-end analysis of operations determined that certain timing
related expense and revenue items had not been recorded properly
throughout the year. As a result, the Company has restated quarterly
results of operations for 1997 to reflect a more equitable distribution
of these items.
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 1997 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 and the December 28, 1995 ten percent stock dividend.
(2) Income Per Share
Net income per share is computed by dividing net income by the weighted
average number of shares of stock outstanding during the period.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial 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 following table sets
forth the computation of basic and diluted EPS:
<TABLE>
<CAPTION> June 30,
1998 1997
(Restated)
<S> <C> <C>
Numerator:
Consolidated net income $10,558,729 $ 2,664,042
Denominator:
Denominator for basic EPS - weighted average shares 11,179,758 11,110,549
Effect of dilutive securities - employee stock options 63,716 149,744
Denominator for diluted EPS 11,243,474 11,260,293
</TABLE>
(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 20,085 options exercised during the six months ended June
30, 1998 and there were 83,678 options exercised during the six
months ended June 30, 1997. For further information regarding stock
options, refer to Note 6 of Notes to Consolidated Financial Statements
included in the Company's 1997 annual report.
8
(5) Dividends
1998
On April 29, 1998 a cash dividend of $.07 per share was declared to
shareholders of record June 12, 1998 and paid June 26, 1998 in the
amount of $785,379.
On February 27, 1998 a cash dividend of $.07 per share was declared to
shareholders of record March 13, 1998 and paid March 27 in the amount
of $783,327.
1997
On October 24, 1997 a cash dividend of $.07 per share was declared to
shareholders of record December 10 and paid December 19 in the amount
of $782,718.
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 amount
of $781,711.
On May 6, 1997 a cash dividend of $.07 per share was declared to
shareholders of record June 13 and paid June 27 in the amount of
$780,878.
On January 20, 1997 a cash dividend of $.10 per share was declared to
shareholders of record February 14 and paid February 28 in the amount
of $1,114,823.
On January 20, 1997 as cash dividend of $.07 per share was declared to
shareholders of record March 14 and paid on March 28 in the amount of
$780,458.
(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' invest-
ment, net of taxes. The cost of fixed maturities is adjusted for amor-
tization 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 income to carrying
values equal to their estimated fair values.
Investment real estate is carried at cost net of accumulated deprecia-
tion of $606,799, $444,381 and $296,589 as of June 30, 1998, December
31, 1997 and June 30, 1997, 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 37 states which writes, through its insurance subsidiaries, both
property-casualty and fidelity-surety insurance. The property-casualty segement
accounts for approximately 70% of the business written while the fidelity-surety
segment accounts for approximately 30% of the Company's business.
The underwriting cylcles of the property-casualty insurance industry have been
characterized by peak periods of adequate rates, underwriting profits and lower
combined ratios, while the downward side of the cycle is characterized by inade-
quate rates, underwriting losses and, as a result, higher combined ratios. The
adequacy of premium rates is affected primarily by the severity and frequency of
claims which in turn are affected by natural disasters, regulatory measures and
court decisions which continue to uphold the "deep pocket" theory in awarding
against insurance companies. Unfortunately for the insurance industry, the trend
of increasing price competition has continued as has the number of significant
natural disasters. This combination has resulted in considerable reduction in
underwriting profitability for the industry as a whole.
Inflation also has a significant impact on the insurance industry in general, as
well as on the Company. Inflation creates higher claim costs, which are then
matched currently against premiums whose rating statistics were developed from
data of previous years. In recent inflationary periods, this has led to inade-
quate rate structures, since rate regualtors are slow to grant rate adjustments
at times when the overall economy is in an inflationary cycle. Studies have
shown that premium rates trail the claim experience by a period of two years or
more. Adequate premium rates continue to be of concern to the Company and the
property casulaty industry as a whole.
OPERATING RESULTS
As mentioned in the Overview section, the property-casualty insurance industry
is in a downward cycle. However, despite a difficult year in 1997, management
believes the company has turned in a solid six month performance, and that the
outlook for the ramainder of the year is positive and on track with financial
goals. The Company's business plan includes expansion of existing products into
new geographic regions, as well as introduction of new coverages, which when
combined with prudent underwriting standards will assure continued profitabil-
ity for our shareholders. Indeed, when the industry's cycle reverses, the
Company will be in an excellenent position to take advantage of premium rate
increases.
For the six months ended June 30, 1998 gross premiums written decreased 2.1%
over the same period in 1997. The decrease was due largely to increased com-
petition in the Company's niche business, as well as continued rate inadequacy.
The Company's plan to conteract the slight decrease in premium writings is to
continue expansion into new states and introduction of new programs. In the
first quarter of 1998 the Company became licensed in the state of Maryland, and
plans to extend workers compensation coverage into new states continue. The
Company has also introduced a business owners protection coverage, with plans
to market the program in all states.
Premiums earned are recognized as net revenues after reduction for reinsurance
ceded and after establishment of the provision for the pro-rata unearned portion
of premiums written. Net premiums earned totaled $44,814,531, $87,451,620 and
$41,886,245 for the respective periods, and net unearned premiums were
$46,264,452, $47,411,849 and $47,695,377 at each respective period.
<TABLE>
<CAPTION> Restated
June 30, December 31, June 30,
1998 1997 1997
<S> <C> <C> <C>
Gross Premiums Written $46,464,458 $99,507,846 $47,448,552
Reinsurance Ceded 2,742,067 7,943,050 1,040,917
Net Premiums Written $43,722,391 $91,564,796 $46,407,635
Net Premiums Earned $44,814,531 $87,451,620 $41,886,245
Net Unearned Premium Reserve $46,264,452 $47,411,849 $47,695,377
The large increase in ceded premiums in 1997 is due to a new reinsurance
agreement entered into during the year. CIC assumed and then fully ceded
capitated dental premiums while retaining a brokerage fee. The Company is
not expected to incur any net losses from this business.
10
The Company's underwriting results can be measured by reference to the com-
bined 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> Restated
June 30, December 31, June 30,
Insurance Operating Ratios (Statutory Basis): 1998 1997 1997
<S> <C> <C> <C>
Loss and Loss Adjustment Expenses 60.4% 70.1% 61.9%
Underwriting Expenses 34.8% 32.1% 34.8%
Combined Ratios 95.2% 102.2% 96.7%
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 com-
bined loss and expense ratio still compares favorably with the commercial
lines industry averages of 101.7% for the first quarter of 1998 and 103.3% for
the year of 1997.
</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 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
The Company's fixed maturities and equity securites are classified as
available-for-sale and are carried at fair value. The unrealized gains and
losses, net of tax, are reported as a separate component of shareholders'
investment.
Interest and Dividend Income: Interest on fixed maturities is recorded as income
when earned and is adjusted for any amortization of purchase premium or dis-
count. Dividends on equity securities are recorded as income on ex-dividend
dates.
<TABLE>
<CAPTION>
June 30, December 31, June 30,
Investments: 1998 1997 1997
<S> <C> <C> <C>
Invested Assets $ 243,267,518 $ 245,644,042 $ 208,402,099
Net Investment Income 4,582,773 8,580,713 4,119,867
Percent of Return to
Average Carrying Value 4.6% 4.9% 5.2%
Realized Gains 7,637,647 15,370,384 379,060
Change in Unrealized Gains(Losses) $ (4,969,733) $ 16,746,287 $ 11,661,117
</TABLE>
The $4,969,733 decrease in unrealized gains for the six months of 1998 was
composed of a $313,952 decrease in market value over cost of the Company's
fixed maturities and a $4,655,781 decrease in market value over cost of the
equity portfolio. The Company has taken over $7.5 million in realized gains
in the first six months of 1998, without which there would have been an
overall increase in unrealized gains. Future investment decisions will be
based on the economy and the stock and bond markets. Net investment income for
the six months of 1998 was up 11.2% over the like period of 1997, but the over-
all rate of return on the investment portfolio has decreased slightly. Before
tax unrealized gains were $44,540,225, $49,509,958 and $44,424,791 as of June
30, 1998, December 31, 1997 and June 30, 1997.
11
INCOME TAXES
Income tax expense is based on income reported for financial statement purposes
and tax laws and rates in effect for the years presented. Deferred federal in-
come taxes arise from timing differences between the recognition of income de-
termined for financial reporting purposes and income tax purposes. Such timing
differences are related principally to the deferral of policy acquisition costs,
the recognition of unearned premiums, and discounting the claims reserves for
tax purposes. Deferred taxes are also provided on unrealized gains and losses.
LOSS RESERVES
Reserves for loss and loss adjustment expenses reflect the Company's best esti-
mate of the liability for the ultimate cost of reported claims and incurred but
not reported (IBNR) claims as of the end of each period. The estimates are based
on past claim experience and consider current claim trends as well as social and
economic conditions. The Company's reserve for loss and loss adjustment expenses
were $74,364,510 as of June 30, 1998 compared with $71,472,338 as of December
31, 1997 and $56,385,730 as of June 30, 1997. In 1997 the Company increased
IBNR reserves by $14.5 million. This increase is expected to stabilize future
development; however, management continues to closely monitor the development
trends and projections as it attempts to contain the increased claim activity
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 (84.2%, 85.7% and 82.6% at each respective
period) of the Company's assets. Cash outflow can be unpredictable for two rea-
sons: first, a large portion of liabilities representing loss reserves have un-
certainty regarding settlement dates; and second, there is potential for losses
occurring either individually or in aggregate. As a result, the Company main-
tains adequate short-term investment programs necessary to ensure the availa-
bility of funds. The investment program is structured so that a forced sale li-
quidation of fixed maturities should not be necessary during the course of ordi-
nary business involvement and activities. The Company has no material capital
expenditure commitments.
YEAR 2000
A significant issue facing not only the insurance industry but society as a
whole is potential computer 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 mis-
interpret a date, using "00" as the year 1900 rather than the year 2000.
During 1996 and 1997 the Company incurred approximately $1.8 million of
expenses in updating its management information system to alleviate potential
year 2000 problems. This process is substantially completed, with only test-
ing and peripheral adjustments remaining. The additional expense for the
testing and adjustments is expected to be approximately $600,000. As a
result 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 2000 related
problems that may be encountered by our agents and third parties, and deter-
mined 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.
12
<TABLE>
INSURANCE SUBSIDIARY FINANCIAL STATEMENTS
Statutory Basis as Reported to State Regulatory Authorities
June 30, 1998, December 31, 1997 and June 30, 1997
CAPITOL INDEMNITY CORPORATION June 30, December 31, June 30,
Balance Sheets 1998 1997 1997
(Restated)
<S> <C> <C> <C>
ASSETS
Cash and Invested Assets $ 225,435,790 $228,121,190 $192,334,844
Other Assets 27,116,514 21,344,680 26,557,919
Total Assets $ 252,552,304 $249,465,870 $218,892,763
LIABILITIES
Reserve for Losses and Loss Expenses $ 73,228,293 $ 71,117,787 $ 55,997,813
Unearned Premiums 45,575,721 46,667,861 47,076,076
Other Liabilities 23,423,979 22,356,111 19,124,764
Total Liabilities 142,227,993 140,141,759 122,198,653
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 110,324,311 109,324,111 96,694,110
Total Liabilities and Capital $ 252,552,304 $249,465,870 $218,892,763
Statements of Income
Premiums Earned $ 44,814,531 $ 87,304,679 $ 41,886,245
Underwriting Deductions 42,118,516 91,152,886 43,996,585
Net Underwriting Gain 2,696,015 (3,848,207) (2,110,340)
Investment Income Including Sales 11,478,355 22,791,517 3,941,775
Other Income 44,785 28,708 34,222
Income Tax Expense 3,902,675 5,809,963 (157,278)
Net Income $ 10,316,480 $ 13,162,055 $ 2,022,935
CAPITOL SPECIALTY INSURANCE CORPORATION
Balance Sheets
ASSETS
Cash and Invested Assets $ 6,051,010 $ 6,353,535 $ 6,948,600
Other Assets 614,006 1,903,026 201,555
Total Assets $ 6,665,016 $ 8,256,561 $ 7,150,155
LIABILITIES
Reserve for Losses and Loss Expenses $ 389,047 $ - $ -
Unearned Premiums - - -
Other Liabilities 382,199 1,818,683 297,392
Total Liabilities 771,246 1,818,683 297,392
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 5,893,770 6,437,878 6,852,763
Total Liabilities and Capital $ 6,665,016 $ 8,256,561 $ 7,150,155
Statements of Income
Premiums Earned $ - $ - $ -
Underwriting Deductions (14,815) (3,719) 10,329
Net Underwriting (Loss) Gain (14,815) (3,719) (10,329)
Investment Income Including Sales 460,409 302,428 159,268
Other Income - - -
Income Tax Expense (Benefit) 116,706 9,111 2,062
Net Income $ 358,518 $ 297,036 $ 146,877
</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 11, 1998,
both of which are dated April 6, 1998 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 Vice President
Capitol Transamerica Corporation American National Bank
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: August 6, 1998
17
CAPITOL TRANSAMERICA CORPORATION
ANNOUNCES RECORD SIX MONTHS EARNINGS
FOR IMMEDIATE RELEASE Contact: Paul J. Breitnauer
Phone (608) 231-4450
Madison, Wisconsin, July 21, 1998 - George A. Fait, Chairman of Capitol
Transamerica Corporation, announced that six months earnings were $10.6 million
($0.94 per share) compared with six months earnings of $2.7 million ($0.24 per
share) in 1997. Six months income in 1998 included $5.0 million or $0.45 per
share of after-tax realized gains while the six months income in 1997 included
$250,000 or $0.02 per share of after-tax realized gains. Excluding realized
gains, net income for the six months of 1998 was $0.49 per share compared with
$0.22 per share for the same period last year. Unless otherwise noted, all per
share amounts are presented on a diluted basis. Fourth quarter adjustments made
in December 1997 for certain revenues and expenses in 1997 have been restated
to provide a more accurate comparison by quarter.
Second quarter 1998 earnings were $7.1 million or $0.63 per share compared
with 1997 second quarter earnings of $624,000 or $0.06 per share. Second quar-
ter 1998 earnings included $0.40 per share of after-tax realized gains, whereas
the second quarter of 1997 included less than $0.01 per share. Excluding net
realized gains, second quarter 1998 and 1997 income was $0.24 and $0.06 per
share, respectively.
Six months earned premiums written for 1998 were $44.8 million compared
with $41.9 million for the first six months of 1997. Earned premiums written
for the second quarter increased from $21.5 million in 1997 to $22.6 million
for the like period in 1998.
Net investment income for the first six months of 1998 was $4.6 million
compared to $4.1 million for the same period of 1997, an increase of 11.2%. Net
investment income for the second quarter was $2.3 million compared with $2.0
million for 1997, a 15.9% increase.
Shareholders' investment increased significantly from $124.7 million at
June 30, 1997 to $145.3 million at June 30, 1998, a 16.5% increase. Unrealized
appreciation on investments, after realized investment gains, was $44.5 million
at June 30, 1998, and after tax was $29.4 million. Total invested assets grew
from $208.4 million at June 30, 1997 to $243.3 million at June 30, 1998, an in-
crease of 16.7%. Cash dividends paid in the first six months of 1998 totaled
$1.6 million or $0.14 per share.
The Company's combined net loss, loss expense and general expense ratio for
the first six months of 1998 was 95.2% compared with 96.7% for the like period
in 1997. The Company's experience continues to be favorable compared to the in-
dustry average of 101.7% for the first quarter of 1998 and 103.3% for the year
of 1997.
Fait reported that "The Company has turned in a solid six month performance
and the outlook for the raminder of the year is positive and on track with fi-
nancial goals. By continuing to take advantage of the resources generated by
our strong surplus position, we are situated to meet the challenge of maintain-
ing a realistically steady pattern of growth, expansion and profitablility."
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
subsidiary insurance companies Capitol Indemnity Corporation and Capitol
Specialty Insurance Corporation. A third subsidiary, Capitol Facilities
Corporation, provides premium financing for the insurance companies.
The Capitol Transamerica Group operates in 37 states and is rated A+ 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
19
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
(in thousands, except per share)
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Six months ended Three months ended
June 30, June 30,
1998 1997 1998 1997
(Restated) (Restated)
<S> <C> <C> <C> <C>
REVENUES
Gross premiums written $ 44,464 $ 47,449 $ 24,789 $ 27,162
Net premiums written 43,722 46,408 23,349 26,561
Net premiums earned $ 44,814 $ 41,886 $ 22,566 $ 21,526
EXPENSES
Claims and claim expenses 26,944 27,678 13,881 14,840
Other underwriting expenses 15,348 15,674 7,624 8,126
Total Losses and Expenses Incurred 42,292 43,352 21,505 22,966
Underwriting income 2,522 (1,466) 1,061 (1,440)
Investment income 4,583 4,120 2,287 1,973
Realized investment gains 7,638 379 6,741 33
Other income 49 36 22 29
Income from Operations Before
Income Tax 14,792 3,069 10,111 595
Income tax expense 4,233 405 3,013 (29)
NET INCOME $ 10,559 $ 2,664 $ 7,098 $ 624
EARNINGS PER SHARE - BASIC $ 0.94 $ 0.24 $ 0.63 $ 0.06
EARNINGS PER SHARE - DILUTED $ 0.94 $ 0.24 $ 0.63 $ 0.06
<CAPTION>
COMPARATIVE FINANCIAL HIGHLIGHTS- Six Months Ended June 30,
1998 1997 1996 1995 1994
Per Share Information (Restated)
<S> <C> <C> <C> <C> <C>
Income per share - diluted $ 0.94 $ 0.24 $ 0.67 $ 0.63 $ 0.47
Consolidated net income $ 10,559 $ 2,664 $ 7,432 $ 6,906 $ 5,192
Weighted average number
of shares outstanding
- diluted 11,243 11,111 11,066 11,034 10,980
Book value per share $ 12.95 $ 11.18 $ 8.89 $ 7.38 $ 6.01
Shareholders' investment $ 145,307 $ 124,692 $ 98,457 $ 81,595 $ 66,250
Dividends paid $ 1,581 $ 2,699 $ 2,222 $ 1,205 $ 1,869
Shares outstanding 11,217 11,155 11,076 11,055 11,015
Company Statistics:
Gross premiums written $ 46,464 $ 47,449 $ 43,653 $ 33,930 $ 29,446
Net investment income $ 4,583 $ 4,120 $ 3,497 $ 3,112 $ 2,536
Invested assets $ 243,268 $ 208,402 $ 157,949 $ 123,889 $ 94,417
Total assets $ 288,942 $ 252,218 $ 194,135 $ 151,564 $ 118,197
Insurance Operating Ratios,
Statutory Basis:
Loss and loss adjustment
expenses: 60.4% 61.9% 50.8% 51.1% 47.7%
Underwriting expenses 34.8% 34.8% 32.2% 32.5% 32.3%
Combined ratios 95.2% 96.7% 83.0% 83.6% 80.0%
20
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
BALANCE SHEETS
(in thousands, except per share)
<CAPTION>
June 30, December 31 June 30,
1998 1997 1997
ASSETS (Restated)
<S> <C> <C> <C>
Investments
Available-for-sale investments at fair value
U.S. Government bonds (cost $54, $67,
and $573, respectively) $ 59 $ 72 $ 577
State and municipal bonds (cost $66,334,
$68,651, and $67,302, respectively) 70,603 73,239 71,891
Corporate bonds (cost $818, $716,
and $1,127, respectively) 867 760 1,213
Common stock (cost $110,607, $101,409,
and $80,917, respectively) 148,728 145,208 119,749
Preferred stock (cost $6,270, $5,854,
and $5,866, respectively) 8,367 6,929 6,780
Investment real estate 8,695 8,123 7,192
Short-term investments 5,949 11,313 1,000
Total Investments 243,268 245,644 208,402
Cash 590 1,203 545
Due from securities brokers 5,212 - -
Receivables 23,602 23,335 27,626
Other assets 16,270 16,500 15,645
TOTAL ASSETS $288,942 $286,682 $252,218
LIABILITIES
Reserves for losses and loss adjustment expenses $ 74,365 $ 71,472 $ 56,386
Unearned premiums 46,264 47,412 47,695
Other liabilities 23,005 28,456 23,445
TOTAL LIABILITIES $143,634 $147,340 $127,526
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
15,000 shares, issued 11,523, 11,503,
and 11,472 shares, respectively $ 11,523 $ 11,503 $ 11,472
Paid-in surplus 21,930 21,832 21,503
Unrealized appreciation on securities carried
at fair value, net of deferred taxes of
$15,144, $16,833, and $15,104, respectively 29,397 32,676 29,320
Retained earnings 82,928 73,732 62,750
Less treasury stock, 305, 324 and 316 shares,
respectively, at cost (470) (401) (353)
TOTAL SHAREHOLDERS' EQUITY 145,308 139,342 124,692
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $288,942 $286,682 $252,218
SHAREHOLDERS' EQUITY PER SHARE $ 12.95 $ 12.46 $ 11.18
SHARES OUTSTANDING 11,217 11,179 11,155
Increase in Sharholders' Equity-
June 30, 1997 to June 30, 1998 16.5%
June 30, 1996 to June 30, 1997 26.6%
21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<DEBT-HELD-FOR-SALE> 71,528,784 73,681,394
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 157,094,612 126,529,295
<MORTGAGE> 0 0
<REAL-ESTATE> 8,695,480 7,191,665
<TOTAL-INVEST> 243,267,518 208,402,099
<CASH> 590,537 545,506
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 13,797,429 13,414,263
<TOTAL-ASSETS> 288,941,620 252,218,499
<POLICY-LOSSES> 74,364,510 56,385,730
<UNEARNED-PREMIUMS> 46,264,452 47,695,377
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 0 0
<COMMON> 11,522,605 11,471,850
0 0
0 0
<OTHER-SE> 134,254,802 113,573,744
<TOTAL-LIABILITY-AND-EQUITY> 288,941,620 252,218,499
44,814,531 41,886,245
<INVESTMENT-INCOME> 4,582,773 4,119,867
<INVESTMENT-GAINS> 7,637,647 379,060
<OTHER-INCOME> 48,908 36,352
<BENEFITS> 26,944,554 27,677,719
<UNDERWRITING-AMORTIZATION> 389,512 (435,949)
<UNDERWRITING-OTHER> 14,958,148 16,110,654
<INCOME-PRETAX> 14,791,645 3,069,100
<INCOME-TAX> 4,232,916 405,058
<INCOME-CONTINUING> 10,558,729 2,664,042
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,558,729 2,664,042
<EPS-PRIMARY> 0.94 0.24
<EPS-DILUTED> 0.94 0.24
<RESERVE-OPEN> 71,472,338 47,702,363
<PROVISION-CURRENT> 13,620,726 16,548,664
<PROVISION-PRIOR> 13,323,828 11,129,055
<PAYMENTS-CURRENT> 7,562,018 6,376,578
<PAYMENTS-PRIOR> 16,490,364 12,617,774
<RESERVE-CLOSE> 74,364,510 56,385,730
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
