SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period ended September 30, 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 (19 1/2) and low price (16 3/4), the
aggregate market value of voting stock held by non-affiliates of the registrant
as of September 30, 1998 was approximately $203,364,965.
Indicate the number of shares of each of the issuer's class of common stock, as
of the latest practicable date:
At September 30, 1998
Common Stock, $1.00 Par Value;
Issued: 11,526,008
Outstanding: 11,220,136
Total Pages: 21
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Part I
Financial Information Page
Consolidated Financial Statements 3 - 7
Notes to Consolidated Financial Statements 8 - 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10 - 12
Condensed Statutory Financial
Statements of Insurance Subsidiaries 13
Part II
Other Information
Other Disclosures 15
Officers and Directors 16
Signatures 17
Exhibit 1 (Press Release) 18 - 21
2
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31, September 30,
1998 1997 1997
(Restated)
<S> <C> <C> <C>
ASSETS
Investments:
Available-for-sale investment securities, at fair value
U.S. Government bonds (amortized cost $52,720, $67,192
and $68,734, respectively) $ 57,391 $ 72,075 $ 72,917
State, municipal and political subdivision bonds (amortized
cost $66,286,975, $68,651,060 and $66,496,343, respectively) 72,148,464 73,239,504 71,176,467
Corporate bonds and notes (amortized cost $818,920,
$716,722 and $716,015, respectively) 808,249 759,937 769,966
Equity securities:
Common stock (cost $118,084,192, $101,409,300 and
$85,111,557, respectively) 130,822,167 145,208,469 134,527,313
Nonredeemable preferred stock (cost $6,769,703, $5,854,291
and $5,116,216, respectively) 7,486,878 6,928,541 6,403,480
Investment real estate, at cost, net of depreciation 9,027,774 8,122,638 7,868,693
Short-term investments, at cost which
approximates fair value 1,106,541 11,312,878 5,522,365
Total Investments 221,457,464 245,644,042 226,341,201
Cash 398,876 1,202,548 475,062
Accrued investment income 1,755,114 1,707,692 1,671,665
Receivables from agents, insureds and others, less allowance for
doubtful accounts of $485,000, $440,000 and $425,000, respectively 19,675,881 20,820,481 22,547,993
Balances due from reinsurers 1,045,722 122,916 193,452
Income taxes recoverable 1,662,027 684,342 3,241,646
Deferred insurance acquisition costs 13,300,265 14,186,941 14,118,308
Prepaid reinsurance premiums 694,050 743,988 696,926
Due from securities brokers 3,196,066 - 3,761,914
Other assets 2,042,036 1,569,325 1,374,816
Total Assets $265,270,736 $286,682,275 $274,422,983
</TABLE>
3
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31, September 30,
1998 1997 1997
(Restated)
<S> <C> <C> <C>
LIABILITIES
Policy liabilities and accruals:
Reserve for losses $ 62,485,472 $ 48,570,173 $ 43,251,938
Reserve for loss adjustment expenses 14,535,800 22,902,165 19,944,276
Unearned premiums 44,444,124 47,411,849 48,559,499
Total Policy Liabilities and Accruals 121,465,396 118,884,187 111,755,713
Accounts payable 2,669,044 2,822,208 3,316,891
Claim drafts outstanding 3,146,577 2,983,360 4,113,569
Due to securities brokers - 5,318,372 -
Balances due to reinsurers 1,610,463 1,337,564 1,922,623
Accrued premium taxes 710,914 337,163 222,580
Deferred income taxes 4,976,548 15,657,280 17,841,772
Total Other Liabilities 13,113,546 28,455,947 27,417,435
Total Liabilities 134,578,942 147,340,134 139,173,148
SHAREHOLDERS' INVESTMENT
Common stock, $1.00 par value, authorized 15,000,000 shares,
issued 11,526,008, 11,502,520 and 11,484,503, respectively 11,526,008 11,502,520 11,484,503
Paid-in surplus 22,219,099 21,832,206 21,582,389
Accumulated other comprehensive income, net of deferred taxes of
$6,565,618, $16,833,386 and $18,850,035, respectively 12,745,021 32,676,572 36,591,241
Retained earnings 84,677,582 73,732,118 65,965,128
Shareholders' investment before treasury stock 131,167,710 139,743,416 135,623,261
Treasury stock, 305,592, 323,638 and 317,200 shares,
respectively, at cost (475,916) (401,275) (373,426)
Total Shareholders' Investment 130,691,794 139,342,141 135,249,835
Total Liabilities and Shareholders' Investment $265,270,736 $286,682,275 $274,422,983
Book Value Per Share $ 11.65 $ 12.46 $ 12.11
Shares Outstanding 11,220,136 11,178,882 11,167,303
</TABLE>
4
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
For the Nine Months For the Three Months
Ended September 31, Ended September 30,
1998 1997 1998 1997
(Restated) (Restated)
<S> <C> <C> <C> <C>
REVENUES
Premiums earned $ 67,554,605 $ 64,559,628 $ 22,740,074 $ 22,673,383
Net investment income 6,891,630 6,240,578 2,308,857 2,120,711
Realized investment gains 7,569,431 4,030,552 31,528 3,651,492
Other revenues (expenses) 75,866 20,746 26,958 (15,606)
Total Revenues 82,091,532 74,851,504 25,107,417 28,429,980
LOSSES AND EXPENSES INCURRED
Losses incurred 33,616,060 36,597,434 10,631,024 13,350,059
Loss adjustment expenses incurred 6,345,384 7,256,117 2,385,866 2,825,773
Underwriting, acquisition and
insurance expenses 21,517,086 22,381,220 7,246,122 6,915,351
Decrease (Increase) in deferred
insurance acquisition costs 886,676 (1,139,994) 497,164 (704,045)
Other expenses 1,071,542 973,017 384,358 328,232
Total Losses and Expenses Incurred 63,436,748 66,067,794 21,144,534 22,715,370
Income from operations before
income taxes 18,654,784 8,783,710 3,962,883 5,714,610
Income tax expense (benefit)
Current 5,768,167 2,033,040 1,437,722 1,816,817
Deferred (412,963) 89,550 (281,521) (99,285)
5,355,204 2,122,590 1,156,201 1,717,532
Net Income $ 13,299,580 $ 6,661,120 $ 2,806,682 $ 3,997,078
INCOME PER SHARE - BASIC $ 1.19 $ 0.60 $ 0.25 $ 0.36
Weighted Avg # of Shares Outstanding-Basic 11,193,710 11,130,388 11,193,710 11,130,388
INCOME PER SHARE - DILUTED $ 1.18 $ 0.59 $ 0.25 $ 0.35
Weighted Avg # of Shares Outstanding-Diluted 11,269,398 11,279,561 11,269,398 11,279,561
5
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS INVESTMENT
<CAPTION>
Common
Common Stock Accumulated
Stock Distributable Other
(Par Value (Par Value Paid-In Comprehensive Retained Comprehensive Treasury
$1.00) $1.00) Surplus Income Earnings Income Stock
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 6,899,060 $ 689,545 $20,949,100 - $51,177,894 $13,259,988 $ (321,707)
Comprehensive income
Net income - - - $18,349,158 18,349,158 - -
Other comprehensive income
Unrealized appreication on a-
vailable-for-sale securities,
net of deferred taxes - - - 13,953,518 - - -
Less: reclassification adjust-
ment, net of tax, for gain
included in net income - - - (5,589,481) - - -
Other comprehensive income - - - 8,364,037 8,364,037 -
Comprehensive income - - - $26,713,195 - - -
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 - $62,761,654 $21,624,025 $ (337,506)
Comprehensive income
Net income - - - $15,191,879 15,191,879 - -
Other comprehensive income
Unrealized appreciation on a-
vailable-for-sale securities,
net of deferred taxes - - - 21,197,000 - - -
Less: reclassification adjust-
ment, net of tax, for gain
included in net income - - - (10,144,453) - - -
Other comprehensive income - - - 11,052,547 - 11,052,547 -
Comprehensive income - - - $26,244,426 - - -
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 - $73,732,118 $32,676,572 $ (401,275)
Comprehensive income
Net income - - - $13,299,580 13,299,580 - -
Other comprehensive income (loss)
Unrealized depreciation on a-
vailable-for-sale securities,
net of deferred taxes - - - (14,935,727) - - -
Less: reclassification adjust-
ment, net of tax, for gain
included in net income - - - (4,995,824) - - -
Other comprehensive loss - - - (19,931,551) - (19,931,551) -
Comprehensive loss - - - $(6,631,971) - - -
Stock options exercised 23,488 - 115,142 - - - (74,641)
Proceeds from treasury share
transactions - - 271,751 - - - -
Cash dividends declared - - - - (2,354,116) -
Balance, September 30, 1998 $11,526,008 $ - $22,219,099 - $84,677,582 $12,745,021 $ (475,916)
6
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
September 30, December 31, September 30,
1998 1997 1997
Cash flows provided by operating activities: (Restated)
<S> <C> <C> <C>
Net Income $13,299,580 $ 15,191,879 $ 6,661,120
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 874,968 1,018,894 727,618
Realized investment gains (7,569,431) (15,370,384) (4,030,552)
Change in:
Deferred insurance acquisition costs 886,676 (1,208,627) (1,139,994)
Unearned premiums (2,967,725) 4,153,016 5,300,666
Allowance for doubtful accounts receivable from agents 45,000 60,000 45,000
Accrued investment income (47,422) (22,752) 13,275
Receivables from agents, insureds and others 1,099,600 (2,168,094) (3,880,606)
Balances due to/from reinsurers (98,483) (284,774) 150,595
Reinsurance recoverable on paid and unpaid losses (551,424) 755,956 835,110
Funds held by ceding reinsurers (43,235) 44,791 44,791
Income taxes payable (977,685) (2,554,594) (5,111,898)
Deferred income taxes (412,964) (78,292) 89,550
Due to/from securities brokers (8,514,438) 11,191,845 2,111,559
Prepaid reinsurance premiums 49,938 (39,840) 7,222
Other assets (283,432) 339,684 498,812
Reserve for losses and loss adjustment expenses 5,548,934 23,769,975 15,493,851
Accounts payable 10,053 (806,814) 818,077
Accrued premium taxes 373,751 (225,410) (339,993)
Net cash provided by operating activities 722,261 33,766,459 18,294,203
Cash flows provided by (used for) investing activities:
Proceeds from sales of available-for-sale investments 34,622,530 44,747,214 19,402,712
Purchases of available-for-sale investments (39,467,991) (78,773,489) (38,392,532)
Maturities of available-for-sale investments 6,141,837 5,064,056 3,990,509
Purchase of depreciable assets (803,933) (477,992) (219,914)
Net cash used for investing activities 492,443 (29,440,211) (15,219,225)
Cash flows provided by (used for) financing activities:
Cash dividends paid (2,354,116) (4,226,165) (3,462,172)
Stock options exercised 410,381 626,022 533,182
Net proceeds from sale of treasury stock (74,641) 111,449 (35,920)
Net cash used for financing activities (2,018,376) (3,488,694) (2,964,910)
Net increase (decrease) in cash (803,672) 837,554 110,068
Cash, beginning of period 1,202,548 364,994 364,994
Cash, end of period $ 398,876 $ 1,202,548 $ 475,062
Cash paid during the year for:
Income taxes $ 6,885,845 $ 9,164,506 $ 7,099,520
</TABLE>
7
CAPITOL TRANSAMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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> September 30,
1998 1997
(Restated)
<S> <C> <C>
Numerator:
Consolidated net income $13,299,580 $ 6,661,120
Denominator:
Denominator for basic EPS - weighted average shares 11,193,710 11,130,388
Effect of dilutive securities - employee stock options 75,688 149,173
Denominator for diluted EPS 11,269,398 11,279,561
</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 23,488 options exercised during the nine months ended Sep-
tember 30, 1998 and there were 65,661 options exercised during the nine
months ended September 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 July 24, 1998 a cash dividend of $.07 per share was declared to
shareholders of record September 11 and paid September 25 in the amount
of $785,410.
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 $785,191.
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 $705,748, $444,381 and $375,370 as of September 30, 1998,
December 31, 1997 and September 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.
OPERATING RESULTS
As mentioned in the Overview section, management believes that the property-
casualty insurance industry is in a downward cycle. However, the Company has
posted increased earnings in the first nine months of 1998. Despite severe
rate competition resulting from over-capitalization of the industry as a whole
and a decrease in premiums written, the Company maintains a strong surplus po-
sition and has restored the combined loss and expense ratio to a level more
typical of the Company's past operations. Management is guardedly optimistic
that the market conditions will improve, and that the Company will be able to
resume a realistically steady pattern of growth, expansion and profitability.
For the nine months ended September 30, 1998 gross premiums written decreased
9.0% over the same period in 1997. The decrease was due largely to increased
competition in the Company's niche business, as well as continued rate inade-
quacy. 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 $67,554,605, $87,451,620 and
$64,559,628 for the respective periods, and net unearned premiums were
$44,444,124, $47,411,849 and $48,559,499 at each respective period.
<TABLE>
<CAPTION> Restated
September 30, December 31, September 30,
1998 1997 1997
<S> <C> <C> <C>
Gross Premiums Written $68,227,907 $99,507,846 $75,017,251
Reinsurance Ceded 3,591,089 7,943,050 5,149,735
Net Premiums Written $64,636,818 $91,564,796 $69,867,516
Net Premiums Earned $67,554,605 $87,451,620 $64,559,628
Net Unearned Premium Reserve $44,444,124 $47,411,849 $48,559,499
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
September 30, December 31, September 30,
Insurance Operating Ratios (Statutory Basis): 1998 1997 1997
<S> <C> <C> <C>
Loss and Loss Adjustment Expenses 59.4% 70.1% 68.2%
Underwriting Expenses 34.4% 32.1% 33.0%
Combined Ratios 93.8% 102.2% 101.2%
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 104.0% for the first six months 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>
September 30, December 31, September 30,
Investments: 1998 1997 1997
<S> <C> <C> <C>
Invested Assets $ 221,457,464 $ 245,644,042 $ 226,341,201
Net Investment Income 6,891,630 8,580,713 6,240,578
Percent of Return to
Average Carrying Value 4.6% 4.9% 5.2%
Realized Gains 7,569,431 15,370,384 4,030,552
Change in Unrealized Gains(Losses) $ (30,199,319) $ 16,746,287 $ 14,967,215
</TABLE>
The $30,199,319 decrease in unrealized gains for the nine months of 1998 was
composed of a $1,218,949 increase in market value over cost of the Company's
fixed maturities and a $31,418,268 decrease in market value over cost of the
equity portfolio. The decrease in unrealized gains through nine months of 1998
is the result of the severe decline in the stock market in the third quarter
combined with the fact that the Company has taken over $7.6 million in realized
gains through September 31, 1998. Net investment income for the nine months of
1998 was up 10.4% over the like period of 1997, but the overall rate of return
on the investment portfolio has decreased slightly. Before tax unrealized gains
were $19,310,639,$49,509,958 and $55,441,276 as of September 30, 1998, December
31, 1997 and September 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 $77,021,272 as of September 30, 1998 compared with $71,472,338 as of De-
cember 31, 1997 and $63,196,214 as of September 30, 1997. In 1997 the Company
increased IBNR reserves by $14.5 million. This increase is expected to stabi-
lize 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 (83.5%, 85.7% and 82.5% 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
September 30, 1998, December 31, 1997 and September 30, 1997
CAPITOL INDEMNITY CORPORATION September 30, December 31, September 30,
Balance Sheets 1998 1997 1997
(Restated)
<S> <C> <C> <C>
ASSETS
Cash and Invested Assets $204,006,209 $228,121,190 $208,982,133
Other Assets 24,864,098 21,344,680 29,997,737
Total Assets $228,870,307 $249,465,870 $238,979,870
LIABILITIES
Reserve for Losses and Loss Expenses $ 75,965,447 $ 71,117,787 $ 62,885,917
Unearned Premiums 43,750,074 46,667,861 47,862,573
Other Liabilities 20,732,170 22,356,111 17,663,883
Total Liabilities 140,447,691 140,141,759 128,412,373
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 88,422,616 109,324,111 110,567,497
Total Liabilities and Capital $228,870,307 $249,465,870 $238,979,870
Statements of Income
Premiums Earned $ 67,554,605 $ 87,304,679 $ 64,559,628
Underwriting Deductions 62,872,796 91,152,886 67,544,656
Net Underwriting Gain 4,681,809 (3,848,207) (2,985,028)
Investment Income Including Sales 13,466,362 22,791,517 9,438,887
Other Income 69,278 28,708 12,386
Income Tax Expense 5,009,985 5,809,963 1,445,690
Net Income $ 13,207,464 $ 13,162,055 $ 5,020,555
CAPITOL SPECIALTY INSURANCE CORPORATION
Balance Sheets
ASSETS
Cash and Invested Assets $ 5,540,649 $ 6,353,535 $ 7,115,334
Other Assets 321,253 1,903,026 660,615
Total Assets $ 5,861,902 $ 8,256,561 $ 7,775,949
LIABILITIES
Payable to parent $ 1,200 $ - $ 290,000
Other Liabilities 8,944 1,818,683 587,157
Total Liabilities 10,144 1,818,683 877,157
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 5,851,758 6,437,878 6,898,792
Total Liabilities and Capital $ 5,861,902 $ 8,256,561 $ 7,775,949
Statements of Income
Underwriting Deductions $ 18,871 $ (3,719) $ 11,412
Net Underwriting (Loss) Gain (18,871) 3,719 (11,412)
Investment Income Including Sales 558,274 302,428 230,232
Income Tax Expense (Benefit) 118,551 9,111 2,039
Net Income $ 420,852 $ 297,036 $ 216,781
</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: November 9, 1998
17
CAPITOL TRANSAMERICA CORPORATION
ANNOUNCES NINE MONTHS EARNINGS
FOR IMMEDIATE RELEASE Contact: Paul J. Breitnauer
Phone (608) 231-4450
Madison, Wisconsin, October 29, 1998 - George A. Fait, Chairman of Capitol
Transamerica Corporation, announced that nine months earnings were $13.3 million
($1.18 per share) compared with nine months earnings of $6.7 million ($0.59 per
share) in 1997, a 99.6% increase. Nine months income in 1998 included $5.0 mil-
lion or $0.44 per share of after-tax realized gains while the nine months in-
come in 1997 included $2.7 million or $0.24 per share of after-tax realized
gains. Excluding realized gains, net income for the nine months of 1998 was
$8.3 million or $0.74 per share compared with $4.0 million or $0.35 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 for each quarter.
Third quarter 1998 earnings were $2.8 million or $0.25 per share compared
with 1997 third quarter earnings of $4.0 million or $0.35 per share. Third quar-
ter 1998 earnings included $21,000 of after-tax realized gains, whereas the
third quarter of 1997 included $2.4 million or $0.21 per share. Excluding net
realized gains, third quarter 1998 and 1997 income was $0.25 and $0.14 per
share, respectively.
Nine months earned premiums increased 4.6% from $64.6 million in 1997 to
$67.6 million in 1998. Earned premiums for the third quarter were $22.7 milion
for both 1998 and 1997.
Net investment income for the nine months of 1998 was $6.9 million compar-
ed to $6.2 million for the same period of 1997, an increase of 10.4%. Net in-
vestment income for the third quarter was $2.3 million compared with $2.1
million for 1997, an 8.9% increase.
While retained earnings and paid up capital increased 19.6% from September
30, 1997 to September 30, 1998, the Company saw an overall decrease in share-
holders' investment. A decrease of $23.8 million in after-tax unrealized gians
on a portion of the Company's equity investment portfolio led to the value
change in total shareholders' investment from $135.2 million at September 30,
1997 to $130.7 million at September 30, 1998. The value of total invested
assets decreased from $226.3 million at September 30, 1997 to $221.5 million at
September 30, 1998, reflecting the decline in the stock market in the third
quarter of 1998. Cash dividends paid through the third quarter of 1998 totaled
$2.4 million or $0.21 per share.
The Company's combined net loss, loss expense and general expense ratio for
the nine months of 1998 was 93.8% compared with 101.2% for the like period in
1997. The Company's experience continues to be favorable compared to the in-
dustry average of 104.0% for the six months of 1998 and 103.3% for the year
of 1997.
Fait reported that "The Company posted increased earnings in the first
nine months of 1998, despite severe rate competition resulting from over-capi-
talization of the industry as a whole and a decrease in premiums written. The
Company maintains a strong surplus position and has restored the combined loss
and expense ratio to a level more typical of the Company's past operations. We
are guardedly optimistic that market conditions will improve and that the
Company will be able to resume a realistically steady pattern of growth, expan-
sion and profitability."
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>
Nine months ended Three months ended
September 30, September 30,
1998 1997 1998 1997
(Restated) (Restated)
<S> <C> <C> <C> <C>
REVENUES
Gross premiums written $ 68,228 $ 75,017 $ 21,763 $ 27,569
Net premiums written 64,637 69,868 20,914 23,460
Net premiums earned $ 67,555 $ 64,560 $ 22,740 $ 22,673
EXPENSES
Claims and claim expenses 39,962 43,854 13,017 16,176
Other underwriting expenses 23,475 22,214 8,128 6,539
Total Losses and Expenses Incurred 63,437 66,068 21,145 22,715
Underwriting income 4,118 (1,508) 1,595 (42)
Investment income 6,892 6,241 2,309 2,121
Realized investment gains 7,569 4,030 32 3,651
Other income 76 21 27 (15)
Income from Operations Before
Income Tax 18,655 8,784 3,963 5,715
Income tax expense 5,355 2,123 1,156 1,718
NET INCOME $ 13,300 $ 6,661 $ 2,807 $ 3,997
EARNINGS PER SHARE - BASIC $ 1.19 $ 0.60 $ 0.25 $ 0.36
EARNINGS PER SHARE - DILUTED $ 1.18 $ 0.59 $ 0.25 $ 0.35
<CAPTION>
COMPARATIVE FINANCIAL HIGHLIGHTS- Nine Months Ended September 30,
1998 1997 1996 1995 1994
Per Share Information (Restated)
<S> <C> <C> <C> <C> <C>
Income per share - diluted $ 1.18 $ 0.59 $ 1.06 $ 0.89 $ 0.71
Consolidated net income $ 13,300 $ 6,661 $ 11,741 $ 9,763 $ 7,794
Weighted average number
of shares outstanding
- diluted 11,269 11,280 11,071 11,041 11,000
Book value per share $ 11.65 $ 12.11 $ 9.62 $ 7.87 $ 6.18
Shareholders' investment $ 130,692 $ 135,250 $ 106,575 $ 87,043 $ 68,148
Dividends paid $ 2,372 $ 3,487 $ 2,979 $ 1,871 $ 2,404
Shares outstanding 11,220 11,167 11,079 11,061 11,026
Company Statistics:
Gross premiums written $ 68,228 $ 75,017 $ 67,444 $ 52,173 $ 44,913
Net investment income $ 6,892 $ 6,241 $ 5,261 $ 4,781 $ 3,889
Invested assets $ 221,457 $ 226,341 $ 170,914 $ 137,768 $ 101,051
Total assets $ 265,271 $ 274,423 $ 207,856 $ 163,903 $ 124,806
Insurance Operating Ratios,
Statutory Basis:
Loss and loss adjustment
expenses: 59.4% 68.2% 51.5% 50.5% 47.9%
Underwriting expenses 34.4% 33.0% 31.8% 32.9% 31.9%
Combined ratios 93.8% 101.2% 83.3% 83.4% 79.8%
20
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
BALANCE SHEETS
(in thousands, except per share)
<CAPTION>
September 30, December 31, September 30,
1998 1997 1997
ASSETS (Restated)
<S> <C> <C> <C>
Investments
Available-for-sale investments at fair value
U.S. Government bonds (cost $53, $67,
and $69, respectively) $ 57 $ 72 $ 73
State and municipal bonds (cost $66,287,
$68,651, and $66,496, respectively) 72,148 73,239 71,176
Corporate bonds (cost $819, $717,
and $716, respectively) 808 760 770
Common stock (cost $118,084, $101,409,
and $85,112, respectively) 130,822 145,208 134,527
Preferred stock (cost $6,770, $5,854,
and $5,116, respectively) 7,487 6,929 6,404
Investment real estate 9,028 8,123 7,869
Short-term investments 1,107 11,313 5,522
Total Investments 221,457 245,644 226,341
Cash 399 1,203 475
Due from securities brokers 3,196 - 3,762
Receivables 24,139 23,335 27,655
Other assets 16,080 16,500 16,190
TOTAL ASSETS $265,271 $286,682 $274,423
LIABILITIES
Reserves for losses and loss adjustment expenses $ 77,021 $ 71,472 $ 63,196
Unearned premiums 44,444 47,412 48,560
Other liabilities 13,114 28,456 27,417
TOTAL LIABILITIES $134,579 $147,340 $139,173
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
15,000 shares, issued 11,526, 11,503,
and 11,485 shares, respectively $ 11,526 $ 11,503 $ 11,485
Paid-in surplus 22,219 21,832 21,582
Accumulated other comprehensive income, net of
deferred taxes of $6,566, $16,833, and
$18,850, respectively 12,745 32,676 36,591
Retained earnings 84,678 73,732 65,965
Less treasury stock, 306, 324 and 317 shares,
respectively, at cost (476) (401) (373)
TOTAL SHAREHOLDERS' EQUITY 130,692 139,342 135,250
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $265,271 $286,682 $274,423
SHAREHOLDERS' EQUITY PER SHARE $ 11.65 $ 12.46 $ 12.11
SHARES OUTSTANDING 11,220 11,179 11,167
21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<DEBT-HELD-FOR-SALE> 73,014,104 72,019,350
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 138,309,045 140,930,793
<MORTGAGE> 0 0
<REAL-ESTATE> 9,027,774 7,868,693
<TOTAL-INVEST> 221,457,464 226,341,201
<CASH> 398,876 475,062
<RECOVER-REINSURE> 0 0
<DEFERRED-ACQUISITION> 13,300,265 14,118,308
<TOTAL-ASSETS> 265,270,736 274,422,983
<POLICY-LOSSES> 77,021,272 63,196,214
<UNEARNED-PREMIUMS> 44,444,124 48,559,499
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 0 0
<COMMON> 11,526,008 11,484,503
0 0
0 0
<OTHER-SE> 119,165,786 123,765,332
<TOTAL-LIABILITY-AND-EQUITY> 265,270,736 274,422,983
67,554,605 64,559,628
<INVESTMENT-INCOME> 6,891,630 6,240,578
<INVESTMENT-GAINS> 7,569,431 4,030,552
<OTHER-INCOME> 75,866 20,746
<BENEFITS> 39,961,444 43,853,551
<UNDERWRITING-AMORTIZATION> 886,676 (1,139,994)
<UNDERWRITING-OTHER> 22,588,628 23,354,237
<INCOME-PRETAX> 18,654,784 8,783,710
<INCOME-TAX> 5,355,204 2,122,590
<INCOME-CONTINUING> 13,299,580 6,661,120
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 13,299,580 6,661,120
<EPS-PRIMARY> 1.19 0.60
<EPS-DILUTED> 1.18 0.59
<RESERVE-OPEN> 71,472,338 47,702,363
<PROVISION-CURRENT> 32,124,000 27,173,032
<PROVISION-PRIOR> 7,837,444 16,680,519
<PAYMENTS-CURRENT> 13,293,000 11,465,627
<PAYMENTS-PRIOR> 21,119,510 16,894,073
<RESERVE-CLOSE> 77,021,272 56,385,730
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
