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, 1999 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 (14) and low price (13 3/4), the
aggregate market value of voting stock held by non-affiliates of the registrant
as of September 30, 1999 was approximately $156,341,682.
Indicate the number of shares of each of the issuer's class of common stock, as
of the latest practicable date:
At September 30, 1999
Common Stock, $1.00 Par Value;
Issued: 11,536,015
Outstanding: 11,267,869
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 and Exhibits
Other Disclosures 15
Officers and Directors 16
Signatures 17
Exhibit 1 (Press Release) 18 - 21
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31, September 30,
1999 1998 1998
<S> <C> <C> <C>
ASSETS
Investments:
Available-for-sale investment securities, at fair value
U.S. Government bonds (amortized cost $42,796, $51,204
and $52,720, respectively) $ 43,558 $ 55,350 $ 57,391
State, municipal and political subdivision bonds (amortized
cost $77,683,184, $67,339,664 and $66,286,975, respectively) 81,875,444 74,182,001 72,148,464
Corporate bonds and notes (amortized cost $876,194,
$819,678 and $818,920, respectively) 849,020 824,109 808,249
Equity securities:
Common stock (cost $124,591,142, $115,583,088 and
$118,084,192, respectively) 119,873,972 135,373,036 130,822,167
Nonredeemable preferred stock (cost $5,975,500, $6,769,703
and $6,769,703, respectively) 6,153,673 7,851,215 7,486,878
Investment real estate, at cost, net of depreciation 10,326,864 9,999,919 9,027,774
Short-term investments, at cost which
approximates fair value 1,553,764 9,854,962 1,106,541
Total Investments 220,676,295 238,140,592 221,457,464
Cash 858,085 1,544,438 398,876
Accrued investment income 1,917,218 1,678,998 1,755,114
Receivables from agents, insureds and others, less allowance for
doubtful accounts of $530,000, $500,000 and $485,000, respectively 16,843,834 17,217,646 19,675,881
Balances due from reinsurers 155,328 913,186 1,045,722
Funds held by ceding reinsurers 35,756 35,756 43,235
Deferred insurance acquisition costs 13,785,484 13,524,777 13,300,265
Prepaid reinsurance premiums 1,151,179 727,074 694,050
Due from securities brokers 3,435,821 1,633,833 3,196,066
Income taxes recoverable- current 1,071,876 141,982 1,662,027
Income taxes recoverable- deferred 1,721,476 - -
Other assets 2,373,758 1,801,315 2,042,036
Total Assets $264,026,110 $277,359,597 $265,270,736
</TABLE>
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31, September 30,
1999 1998 1998
<S> <C> <C> <C>
LIABILITIES
Policy liabilities and accruals:
Reserve for losses $ 52,981,090 $ 55,336,376 $ 62,485,472
Reserve for loss adjustment expenses 24,636,275 23,167,674 14,535,800
Unearned premiums 40,912,754 41,541,432 44,444,124
Total Policy Liabilities and Accruals 118,530,119 120,045,482 121,465,396
Accounts payable 4,063,395 3,340,980 2,669,044
Claim drafts outstanding 3,550,135 2,836,566 3,146,577
Due to securities brokers 903,677 231,185 -
Balances due to reinsurers 1,318,840 1,038,967 1,610,463
Accrued premium taxes 271,889 237,171 710,914
Income taxes payable - 91,444 -
Deferred income taxes - 8,221,829 4,976,548
Total Other Liabilities 10,107,936 15,998,142 13,113,546
Total Liabilities 128,638,055 136,043,624 134,578,942
SHAREHOLDERS' INVESTMENT
Common stock, $1.00 par value, authorized 15,000,000 shares,
issued 11,536,015, 11,529,376 and 11,526,008, respectively 11,536,015 11,529,376 11,526,008
Paid-in surplus 22,570,682 22,246,366 22,219,099
Accumulated other comprehensive (loss) income, net of deferred taxes of
($129,901), $9,702,829 and $6,565,618, respectively (241,248) 18,019,545 12,745,021
Retained earnings 102,018,165 90,016,245 84,677,582
Shareholders' investment before treasury stock 135,883,614 141,811,532 131,167,710
Treasury stock, 268,146, 307,196 and 305,592 shares,
respectively, at cost (495,559) (495,559) (475,916)
Total Shareholders' Investment 135,388,055 141,315,973 130,691,794
Total Liabilities and Shareholders' Investment $264,026,110 $277,359,597 $265,270,736
Book Value Per Share $ 12.02 $ 12.59 $ 11.65
Shares Outstanding 11,267,869 11,222,180 11,220,136
</TABLE>
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
For the Nine Months For the Three Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES
Premiums earned $ 62,485,746 $ 67,554,605 $ 20,969,513 $ 22,740,074
Net investment income 6,738,773 6,891,630 2,299,894 2,308,857
Realized investment gains 7,796,106 7,569,431 2,535,863 31,528
Other revenues 181,010 75,866 51,940 26,958
Total Revenues 77,201,635 82,091,532 25,857,210 25,107,417
LOSSES INCURRED AND EXPENSES
Losses incurred 25,412,081 33,616,060 9,721,718 10,631,024
Loss adjustment expenses incurred 7,747,385 6,345,384 3,649,534 2,385,866
Underwriting, acquisition and
insurance expenses 22,487,587 21,517,086 7,425,510 7,246,122
(Increase) decrease in deferred
insurance acquisition costs (260,707) 886,676 329,556 497,164
Other expenses 1,005,284 1,071,542 334,568 384,358
Total Losses Incurred
and Expenses 56,391,630 63,436,748 21,460,886 21,144,534
Income from operations before
income taxes 20,810,005 18,654,784 4,396,324 3,962,883
Income tax expense (benefit)
Current 6,555,699 5,768,167 1,597,051 1,437,722
Deferred (110,574) (412,963) (308,160) (281,521)
6,445,125 5,355,204 1,288,891 1,156,201
Net Income $ 14,364,880 $ 13,299,580 $ 3,107,433 $ 2,806,682
INCOME PER SHARE - BASIC $ 1.28 $ 1.19 $ 0.28 $ 0.25
Weighted Average Number of Shares
Outstanding - Basic 11,241,710 11,193,710 11,241,710 11,193,710
INCOME PER SHARE - DILUTED $ 1.27 $ 1.18 $ 0.28 $ 0.25
Weighted Average Number of Shares
Outstanding - Diluted 11,271,876 11,269,398 11,271,876 11,269,398
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS INVESTMENT
AND COMPREHENSIVE INCOME
<CAPTION>
Accumu-
Common lated
Common Stock Other
Stock Distributable Compre- Compre-
(Par Value (Par Value Paid-In hensive hensive Retained Treasury
$1.00) $1.00) Surplus Income Income Earnings Stock
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 7,612,711 $ 3,806,355 $21,114,644 $ - $21,624,025 $ 62,761,654 $(337,506)
Comprehensive income
Net income - - - 15,191,879 - 15,191,879 -
Other comprehensive income
Unrealized appreciation on
available-for sale securities,
net of deferred taxes - - - 21,197,000 - - -
Less: reclassification adjust-
ment, net of tax of $5,225,931,
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)
Purchases and sales of treasury
stock, net - - 175,218 - - - -
Stock dividend 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)
Comprehensive income (loss)
Net income - - - 19,423,913 - 19,423,913 -
Other comprehensive loss
Unrealized depreciation on
available-for sale securities,
net of deferred taxes - - - (6,078,237) - - -
Less: reclassification adjust-
ment, net of tax of $4,619,349,
for gain included in net income - - - (8,578,790) - - -
Other comprehensive loss - - - (14,657,027) (14,657,027) - -
Comprehensive income - - - 4,766,886 - - -
Stock options exercised 26,856 - 142,409 - - - (18,952)
Purchases and sales of treasury
stock, net - - 271,751 - - - (75,332)
Cash dividends declared - - - - - (3,139,786) -
Balance, December 31, 1998 $11,529,376 - $22,246,366 - $18,019,545 $ 90,016,245 $(495,559)
Compehensive income (loss)
Net income - - - 14,364,880 - 14,364,880 -
Other comprehensive loss
Unrealized depreciation on
available-for sale securities,
net of deferred taxes - - - (13,193,324) - - -
Less: reclassification adjust-
ment, net of tax of $2,728,637,
for gain included in net income - - - (5,067,469) - - -
Other comprehensive loss - - - (18,260,793) (18,260,793) - -
Comprehensive loss - - - (3,895,913) - - -
Stock options exercised 6,639 - 33,892 - - - -
Purchases and sales of treasury
stock, net - - 290,424 - - - -
Cash dividends declared - - - - - (2,362,960) -
Balance, September 30, 1999 $11,536,015 - $22,570,682 - $ (241,248)$102,018,165 $(495,559)
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
September 30, December 31, September 30,
1999 1998 1998
Cash flows provided by operating activities:
<S> <C> <C> <C>
Net Income $14,364,880 $ 19,423,913 $ 13,299,580
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 815,254 1,195,955 874,968
Realized investment gains (7,796,106) (13,198,139) (7,569,431)
Change in:
Deferred insurance acquisition costs (260,707) 662,164 886,676
Unearned premiums (628,678) (5,870,417) (2,967,725)
Allowance for doubtful accounts receivable from agents 30,000 60,000 45,000
Accrued investment income (238,220) 28,694 (47,422)
Receivables from agents, insureds and others 343,812 3,542,835 1,099,600
Balances due to/from reinsurers 271,121 (191,361) (98,483)
Reinsurance recoverable on paid and unpaid losses 766,610 (897,506) (551,424)
Funds held by ceding reinsurers - (35,756) (43,235)
Income taxes payable (1,021,338) 633,804 (977,685)
Deferred income taxes (110,575) (304,896) (412,964)
Due to/from securities brokers (1,129,496) (6,721,020) (8,514,438)
Prepaid reinsurance premiums (424,105) 16,914 49,938
Other assets (612,445) (5,305) (283,432)
Reserve for losses and loss adjustment expenses (886,685) 7,031,712 5,548,934
Accounts payable 1,435,984 371,977 10,053
Accrued premium taxes 34,718 (99,992) 373,751
Net cash provided by operating activities 4,954,024 5,643,576 722,261
Cash flows provided by (used for) investing activities:
Proceeds from sales of available-for-sale investments 27,319,608 40,484,195 34,622,530
Purchases of available-for-sale investments (36,970,188) (49,573,482) (39,467,991)
Maturities of available-for-sale investments 6,555,425 7,660,719 6,141,837
Purchase of depreciable assets (513,217) (1,080,065) (803,933)
Net cash used for investing activities (3,608,372) (2,508,633) 492,443
Cash flows provided by (used for) financing activities:
Cash dividends paid (2,362,960) (3,139,786) (2,354,116)
Stock options exercised 40,531 150,314 410,381
Net proceeds from sale of treasury stock 290,424 196,419 (74,641)
Net cash used for financing activities (2,032,005) (2,793,053) (2,018,376)
Net (decrease) increase in cash (686,353) 341,890 (803,672)
Cash, beginning of period 1,544,438 1,202,548 1,202,548
Cash, end of period $ 858,085 $ 1,544,438 $ 398,876
Cash paid during the year for:
Income taxes $ 8,377,064 $ 8,358,132 $ 6,885,845
</TABLE>
CAPITOL TRANSAMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(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, 1998, and the Consolidated Statement
of Cash Flows as of December 31, 1998, 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.
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 1998 annual
report on Form 10-K.
(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 (SFAS 128), "Earnings per Share," which re-
places 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, Dec. 31, September 30,
1999 1998 1998
<S> <C> <C> <C>
Numerator:
Consolidated net income $14,364,880 $19,423,913 $13,299,580
Denominator:
Denominator for basic EPS - weighted average shares 11,241,710 11,206,018 11,193,710
Effect of dilutive securities - employee stock options 30,166 74,424 75,688
Denominator for diluted EPS 11,271,876 11,280,442 11,269,398
</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 6,639 options exercised during the nine months ended Sep-
tember 30, 1999 and there were 23,488 options exercised during the
nine months ended September 30, 1998. For further information regarding
stock options, refer to Note 6 of Notes to Consolidated Financial
Statements included in the Company's 1998 annual report.
(5) Dividends
1999
On July 23, 1999 a cash dividend of $.07 per share was declared to
shareholders of record September 10, 1999 and paid September 24, 1999
in the amount of $788,751.
On May 13, 1999 a cash dividend of $.07 per share was declared to
shareholders of record June 11, 1999 and paid June 25, 1999 in the
amount of $788,708.
On February 26, 1999 a cash dividend of $.07 per share was declared to
shareholders of record March 12, 1999 and paid March 26, 1999 in the
amount of $785,999.
1998
On October 21, 1998 a cash dividend of $.07 per share was declared to
shareholders of record December 4, 1998 and paid December 18, 1998 in
the amount of $785,669.
On July 24, 1998 a cash dividend of $.07 per share was declared to
shareholders of record September 11, 1998 and paid September 25, 1998
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, 1998 in the
amount of $783,327.
(6) Investments
Fixed maturities and equity securities are classified as available-for-
sale and, accordingly, are carried at fair value, with unrealized gains
and losses reported as a separate component of shareholders' investment
net of taxes. The cost of fixed maturities is adjusted for amortization
of premiums and accretion of 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 $1,047,699, $789,597 and $705,748 as of September 30, 1999,
December 31, 1998 and September 30, 1998, respectively. The real estate
is depreciated over the estimated useful life of the asset.
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.
(8) Industry Segment Disclosures
Effective January 1, 1998 the Company adopted the Financial Accounting
Standards Board's Statement of Financial Standards No. 131, "Dis-
closures about Segments of an Enterprise and Related Information."
The adoption of SFAS No. 131 did not affect results of operations or
financial position, but did affect the disclosures of segment inform-
ation.
The Company has three business segments, which are segregated based
on the types of products and services provided. The segments are
(1) property and casualty, (2) fidelity and surety, and (3) discon-
tinued reinsurance assumed operations. These segments constitute
100% of the operations of the Company. Data for each segment as
required for interim reporting follows:
<TABLE>
<CAPTION>
Year to Date
September 30, December 31, September 30,
1999 1998 1998
<S> <C> <C> <C>
Total Revenues:
Property & Casualty $ 52,407,467 $ 72,420,673 $ 54,012,830
Fidelity & Surety 14,994,117 23,640,597 18,317,155
Reinsurance Assumed 599,351 824,414 527,477
Totals: $ 68,000,935 $ 96,885,684 $ 72,857,462
Before-tax Profit (Loss):
Property & Casualty $ 9,470,258 $ 11,793,098 $ 9,605,930
Fidelity & Surety 1,863,266 2,582,866 626,710
Reinsurance Assumed 342,693 410,173 272,743
Totals: $ 11,676,217 $ 14,786,137 $ 10,505,383
Reconciliation to Consolidated GAAP:
Capital and Surplus 7,842,507 12,817,913 8,232,783
Inter-company Adjustments 1,291,281 396,938 (83,382)
Consolidated net income before-tax:$ 20,810,005 $ 28,000,988 $ 18,654,784
</TABLE>
There has been no material change in the allocation of assets among the
segments, and there has been no change in the method of measurement for
the results of the segment operations.
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 75% of the business written while the fidelity-surety
segment accounts for approximately 25% 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 award-
ing against insurance companies. Unfortunately for the insurance industry, the
trend of increasing price competition has continued as has the number of signi-
ficant natural disasters. This combination has resulted in considerable reduct-
ion in underwriting profitability for the industry as a whole.
Adequate premium rates continue to be of concern to the Company and the proper-
ty-casualty insurance industry as a whole. Mangement feels strongly that rate
regulators have been slow to adjust rates in response to increased claim costs
from the factors noted above. This, when combined with increased competition in
the Companys' niche market, has presented an unprecedented challenge to manage-
ment. The Company has responded to this challenge with increased marketing ef-
forts as well as the addition of innovative programs and alliances that should
position the Company for continued expansion and profitability.
OPERATING RESULTS
As mentioned in the Overview section, management belives that the property-
casualty insurance industry is in a downward cycle. The continuing price com-
petition as well as a re-underwriting of the Company's book of business has led
to a slight decrease in premium writings through the nine months of 1999. While
management cannot anticipate when or if the price competition might abate, it
is confident that the increased marketing efforts, combined with the implemen-
tation of new coverages, will restore premium production to the upward trend
seen historically.
For the nine months ended September 30, 1999, gross premiums written totaled
$65,473,654, down 4.0% over the $68,227,907 written in the first nine months
of 1998. The new programs begun by the Company are just beginning to influence
premium totals, and as they become fully implemented premium results should be-
come much more favorable.
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 $62,485,746, $88,629,476 and
$67,554,605 for the respective periods, and net unearned premiums were
$40,912,754, $41,541,432 and $44,444,124 at each respective period.
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1999 1998 1998
<S> <C> <C> <C>
Gross Premiums Written $65,473,654 $87,929,152 $68,227,907
Reinsurance Ceded 4,040,692 5,153,179 3,591,089
Net Premiums Written $61,432,962 $82,775,973 $64,636,818
Net Premiums Earned $62,485,746 $88,629,476 $67,554,605
Net Unearned Premium Reserve $40,912,754 $41,541,432 $44,444,124
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 adjust-
ment expenses are stated as a ratio of net premiums earned, while underwriting
expenses are stated as a ratio of net premiums written. The combined ratios
were as follows:
<CAPTION>
September 30, December 31, September 30,
Insurance Operating Ratios (Statutory Basis): 1999 1998 1998
<S> <C> <C> <C>
Loss and Loss Adjustment Expenses 53.3% 59.4% 59.4%
Underwriting Expenses 37.5% 35.6% 34.4%
Combined Ratios 90.8% 95.0% 93.8%
The increased claim activity that the Company experienced in 1997 and 1998 has
stabilized, as indicated by a decrease in the loss and loss adjustment expense
portion of the combined ratio. The underwriting expense portion of the ratio in-
creased slightly due mostly to the decrease in the denominator, which is net
premiums written. The Company's combined ratio continues to compare very favor-
ably with the industry average, which was 105.6% for the six months of 1999.
</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 accre-
tion of discount. Dividends on equity securities are recorded as income on ex-
dividend dates.
<TABLE>
<CAPTION>
September 30, December 31, September 30,
Investments: 1999 1998 1998
<S> <C> <C> <C>
Invested Assets $ 220,676,295 $ 238,140,592 $ 221,457,464
Net Investment Income 6,738,773 9,119,936 6,891,630
Percent of Return to
Average Carrying Value 4.2% 4.5% 4.6%
Realized Gains 7,796,106 13,198,139 7,569,431
Net Change in Unrealized Gains/(Losses) $ (18,260,793) $ (14,657,027) $ (19,931,551)
</TABLE>
The $18,260,793 decrease in unrealized gains for the nine months of 1999 was
composed of a $1,743,995 decrease in market value over cost of the Company's
fixed maturities and a $16,516,798 decrease in market value over cost of the
equity portfolio. Net investment income has remained relatively stable over the
past few years, and is not expected to fluctuate materially in the near future.
The Company invests more heavily in the equity market than many other insurance
companies, so the rate of return on invested assets is comparatively low. How-
ever, management believes that this is more than offset by the long-term return
on equity provided by stock investments. Although the Company has seen a recent
downturn in the market value of the Company's investment portfolio, management
views the downturn as temporary, and believes the current market conditions pro-
vide an even greater opportunity to invest and build shareholder value over the
long term.
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 so-
cial and economic conditions. The Company's reserve for losses and loss adjust-
ment expenses were $77,617,365 as of September 30, 1999 compared with
$78,504,050 as of December 31, 1998 and $77,021,272 as of September 30, 1998.
The trend of increasing reserves for losses and loss adjustment expenses has
subsided, as premium writings are down and loss activity has stabilized. Manage-
ment continues to closely monitor the reserve development trends and projec-
tions.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the Company's ability to meet obligations as they become
due. The obligations and cash outflow of the Company include claims settlements,
acquisition and administrative expenses, investment purchases and dividends to
shareholders. In addition to satisfying obligations and cash outflow through
premium collections, there is cash inflow obtained from interest and dividend
income, maturities and sales of investments. Because cash inflow from premiums
is received in advance of cash outflow required to settle claims, the Company
accumulates funds which it invests pending liquidity requirements. Therefore,
investments represent the majority (83.6%, 85.9% and 83.5% 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 ragher 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 the year 2000.
Over the past three years the Company has incurred approximately $2.8 million of
expenses in updating its management system to alleviate potential year 2000
problems. This process has been completed, and as a result of these efforts,
the Company is confident that the year 2000 will not cause a significant disrup-
tion 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 determined that
any impact would not be material relative to the operations of the Company. How-
ever, there can be no guarantee that actual results would not differ materially
from those anticipated; therefore, the Company has developed a contingency plan
in the event of a worst-case scenario.
<TABLE>
INSURANCE SUBSIDIARY FINANCIAL STATEMENTS
Statutory Basis as Reported to State Regulatory Authorities
September 30, 1999, December 31, 1998 and September 30, 1998
CAPITOL INDEMNITY CORPORATION September 30, December 31, September 30,
Balance Sheets 1999 1998 1998
<S> <C> <C> <C>
ASSETS
Cash and Invested Assets $205,922,045 $217,813,120 $204,006,209
Other Assets 21,481,633 19,542,328 24,864,098
Total Assets $227,403,678 $237,355,448 $228,870,307
LIABILITIES
Reserve for Losses and Loss Expenses $ 77,294,600 $ 77,094,939 $ 75,965,447
Unearned Premiums 39,761,575 40,814,358 43,750,074
Other Liabilities 18,413,287 16,543,315 20,732,170
Total Liabilities 135,469,462 134,452,612 140,447,691
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 91,934,216 102,902,836 88,422,616
Total Liabilities and Capital $227,403,678 $237,355,448 $228,870,307
Statements of Income
Premiums Earned $ 62,485,746 $ 88,502,969 $ 67,554,605
Underwriting Deductions 56,818,859 82,659,222 62,872,796
Net Underwriting Gain 5,666,887 5,843,747 4,681,809
Investment Income Including Sales 13,178,590 20,967,446 13,466,362
Other Income 179,106 106,675 69,278
Income Tax Expense 5,808,103 7,866,629 5,009,985
Net Income $ 13,216,480 $ 19,051,239 $ 13,207,464
CAPITOL SPECIALTY INSURANCE CORPORATION
Balance Sheets
ASSETS
Cash and Invested Assets $ 4,687,587 $ 5,732,082 $ 5,540,649
Other Assets 239,990 140,872 321,253
Total Assets $ 4,927,577 $ 5,872,954 $ 5,861,902
LIABILITIES
Payable to Parent $ - $ - $ 1,200
Other Liabilities 7,710 7,709 8,944
Total Liabilities 7,710 7,709 10,144
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 4,919,867 5,865,245 5,851,758
Total Liabilities and Capital $ 4,927,577 $ 5,872,954 $ 5,861,902
Statements of Income
Underwriting Deductions 6,189 (1,216) 18,871
Net Underwriting (Loss) Gain (6,189) 1,216 (18,871)
Investment Income Including Sales 884,191 600,404 558,274
Income Tax Expense 250,674 122,601 118,551
Net Income $ 627,328 $ 479,019 $ 420,852
</TABLE>
PART II
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 17, 1999, both of which are dated April 9, 1999 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
Item 7. Forward-looking Statements
The Private Securities Litigation Reform Act of 1995 encourages
corporations to provide investors with information about the
company's anticipated performance and provides protection from
liability if future results are not the same as managements ex-
pectations. This document contains certain forward-looking state-
ments that are based on assumptions which management believes
are reasonable, but by their nature, inherently uncertain. Future
results could differ materially from those projected.
CAPITOL TRANSAMERICA CORPORATION
Subsidiaries
Capitol Indemnity Corporation
Capitol Specialty Insurance Corporation
Capitol Facilities Corporation
Board of Directors
Paul J. Breitnauer Michael J. Larson
Vice President and Treasurer Retired, formerly with
Capitol Transamerica Corporation American National Bank
Deforest, 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
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 13, 1999
EXHIBIT I
CAPITOL TRANSAMERICA CORPORATION
ANNOUNCES RECORD NINE MONTHS EARNINGS
FOR IMMEDIATE RELEASE Contact: Paul J. Breitnauer
Phone (608) 231-4450
Madison, Wisconsin, October 26, 1999- George A. Fait, Chairman of Capitol
Transamerica Corporation, announced that nine months earnings were $14.4 million
or $1.27 per share compared with $13.3 million or $1.18 per share in 1998, an
8.0% increase. Nine months income in 1999 included $5.1 million or $0.45 per
share of after-tax realized investment gains versus $4.9 million or $0.44 per
share in 1998. Excluding realized gains, net income for the nine months of 1999
was $9.3 million or $0.82 per share compared with $8.4 million or $0.74 per
share for the same period last year. Unless otherwise noted, all per share
amounts are presented on a diluted basis.
Third quarter 1999 earnings were $3.1 million or $0.28 per share compared
with 1998 third quarter earnings of $2.8 million or $0.25 per share. Third
quarter 1999 earnings had $1.6 million or $0.15 per share of after-tax realized
gains whereas the third quarter of 1998 included less than $0.01 per share. Ex-
cluding net realized gains, third quarter 1999 and 1998 net income was $0.13
and $0.25 per share, respectively.
Continuing price competition as well as the re-underwriting of the
Company's book of business has led to a slight decrease in premium writings.
Nine months gross premiums written were $65.5 million in 1999 compared with
$68.2 million in 1998. Gross premiums for the third quarter were $20.8 million
in 1999 compared with $21.8 million last year. Increased marketing efforts com-
bined with the implementation of new coverages should restore premium production
to the upward trend seen historically.
Year-to-date net investment income for 1999 was $6.7 million compared to
$6.9 million for the nine months of 1998, and third quarter net investment in-
come was unchanged at $2.3 million for both years.
Total shareholders' investment increased 3.6% in the last twelve months,
rising from $130.7 million at September 30, 1998 to $135.4 million at September
30, 1999. A decrease of $13.0 million in after-tax unrealized gains on the Com-
pany's investment portfolio slowed the trend of growing shareholder value; how-
ever, the current investment strategy appears to be in the best interest of pro-
viding long-term return on equity.
The value of invested assets was $220.7 million at September 30, 1999 com-
pared with $221.5 million at September 30, 1998. The Company has taken sub-
stantial gains on its investment portfolio, with the proceeds being reinvested
into securities that will provide maximum value to shareholders.
The Company's combined loss, loss expense and general expense ratio has
decreased to 90.8% at September 30, 1999 from 93.8% at September 30, 1998, which
compares very favorably to the industry average of 105.6% for the six months of
1999.
Fait reported that "The Company is pleased to report increased earnings in
the first nine months of 1999, despite severe rate competition, over-capitaliza-
tion and a planned decrease in premiums written. We made the decision to re-un-
derwrite the entire book of business in order to stabilize loss development that
we began to experience in 1997 and 1998. This has affected premium production,
but we are confident that premiums will rebound as our marketing and product
development efforts begin to take effect."
Capitol Transamerica Corporation is an insurance holding company operating
a national insurance business writing specialty lines of commercial property
and casualty policies as well as fidelity and surety coverages through its sub-
sidiary insurance companies Capitol Indemnity Corporation and Capitol Specialty
Insurance Corporation. A third subsidiary, Capitol Facilities Corporation, pro-
vides premium financing for the insurance companies.
The Capitol Transamerica Group operates in 37 states and is rated A+
(Superior) by A.M. Best Company, Inc., an independent organization that analyzes
the insurance industry.
Capitol Transamerica Corporation, with 11.3 million shares outstanding, is
traded on the National Over-the-Counter Stock Market under the symbol CATA.
FINANCIAL HIGHLIGHTS FOLLOW
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share)
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES
Gross premiums written $ 65,474 $ 68,228 $ 20,815 $ 21,763
Net premiums written 61,433 64,637 19,415 20,914
Net premiums earned $ 62,486 $ 67,555 $ 20,969 $ 22,740
EXPENSES
Claims and claim expenses 33,160 39,962 13,371 13,017
Other underwriting expenses 23,232 23,475 8,090 8,128
Total Losses and Expenses Incurred 56,392 63,437 21,461 21,145
Underwriting income 6,094 4,118 (492) 1,595
Investment income 6,739 6,892 2,300 2,309
Realized investment gains 7,796 7,569 2,536 32
Other income 181 76 52 27
Income Before Income Tax 20,810 18,655 4,396 3,963
Income tax expense 6,445 5,355 1,289 1,156
NET INCOME $ 14,365 $ 13,300 $ 3,107 $ 2,807
EARNINGS PER SHARE- BASIC $ 1.28 $ 1.19 $ 0.28 $ 0.25
EARNINGS PER SHARE- DILUTED $ 1.27 $ 1.18 $ 0.28 $ 0.25
<CAPTION>
COMPARATIVE FINANCIAL HIGHLIGHTS- Nine Months Ended September 30,
1999 1998 1997 1996 1995
Per Share Information
<S> <C> <C> <C> <C> <C>
Income per share-diluted $ 1.27 $ 1.18 $ 0.59 $ 1.06 $ 0.89
Consolidated net income $ 14,365 $ 13,300 $ 6,661 $ 11,741 $ 9,763
Weighted average number of
shares outstanding- diluted 11,272 11,269 11,280 11,071 11,041
Book value per share $ 12.02 $ 11.65 $ 12.11 $ 9.62 $ 7.87
Shareholders' investment $ 135,388 $ 130,692 $ 135,250 $ 106,575 $ 87,043
Dividends paid $ 2,375 $ 2,372 $ 3,487 $ 2,979 $ 1,871
Shares outstanding 11,268 11,220 11,167 11,079 11,061
Company Statistics:
Gross premiums written $ 65,474 $ 68,228 $ 75,017 $ 67,444 $ 52,173
Net investment income $ 6,739 $ 6,892 $ 6,241 $ 5,261 $ 4,781
Invested assets $ 220,676 $ 221,457 $ 226,341 $ 170,914 $ 137,768
Total assets $ 264,026 $ 265,271 $ 274,423 $ 207,856 $ 163,903
Insurance Operating Ratios,
Statutory Basis:
Loss and loss adjustment
expenses: 53.3% 59.4% 68.2% 51.5% 50.5%
Underwriting expenses 37.5% 34.4% 33.0% 31.8% 32.9%
Combined ratios 90.8% 93.8% 101.2% 83.3% 83.4%
20
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
BALANCE SHEETS
(in thousands, except per share)
<CAPTION>
September 30, December 31, September 30,
1999 1998 1998
ASSETS
<S> <C> <C> <C>
Investments
Available-for-sale investments at fair value
U.S. Government bonds (cost $41, $51 and
$53, respectively) $ 43 $ 56 $ 57
State and municipal bonds (cost $77,683,
$67,340 and $66,287, respectively) 81,875 74,182 72,148
Corporate bonds (cost $876, $820 and
$819, respectively) 849 824 808
Common stock (cost $124,591, $115,583 and
$118,084, respectively) 119,874 135,373 130,822
Preferred stock (cost $5,976, $6,770 and
$6,770, respectively) 6,154 7,851 7,487
Investment real estate 10,327 10,000 9,028
Short-term investments 1,554 9,855 1,107
Total Investments 220,676 238,141 221,457
Cash 858 1,544 399
Due from securities brokers 3,436 1,634 3,196
Receivables 19,988 19,952 24,139
Other assets 19,068 16,089 16,080
TOTAL ASSETS $264,026 $277,360 $265,271
LIABILITIES
Reserves for losses and loss adjustment expenses $ 77,617 $ 78,504 $ 77,021
Unearned premiums 40,913 41,542 44,444
Other liabilities 10,108 15,998 13,114
TOTAL LIABILITIES $128,638 $136,044 $134,579
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
15,000 shares, issued 11,536, 11,529 and
11,526 shares, respectively $ 11,538 $ 11,529 $ 11,523
Paid-in surplus 22,589 22,246 22,202
Accumulated other comprehensive income, net
of deferred taxes of ($130), $9,703
and $6,566, respectively (241) 18,020 12,745
Retained earnings 102,018 90,016 84,678
Less treasury stock, 268, 307, and 306 shares,
respectively, at cost (496) (495) (476)
TOTAL SHAREHOLDERS' EQUITY 135,388 141,316 130,692
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $264,026 $277,360 $265,271
SHAREHOLDERS' EQUITY PER SHARE $ 12.02 $ 12.59 $ 11.65
SHARES OUTSTANDING 11,268 11,222 11,220
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 82,768,022
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 126,027,645
<MORTGAGE> 0
<REAL-ESTATE> 10,326,864
<TOTAL-INVEST> 220,676,295
<CASH> 858,085
<RECOVER-REINSURE> 155,328
<DEFERRED-ACQUISITION> 13,785,484
<TOTAL-ASSETS> 264,026,110
<POLICY-LOSSES> 77,617,365
<UNEARNED-PREMIUMS> 40,912,754
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 11,536,015
0
0
<OTHER-SE> 123,852,040
<TOTAL-LIABILITY-AND-EQUITY> 264,026,110
62,485,746
<INVESTMENT-INCOME> 6,738,773
<INVESTMENT-GAINS> 7,796,106
<OTHER-INCOME> 181,010
<BENEFITS> 33,159,466
<UNDERWRITING-AMORTIZATION> (260,707)
<UNDERWRITING-OTHER> 22,487,587
<INCOME-PRETAX> 20,810,005
<INCOME-TAX> 6,445,125
<INCOME-CONTINUING> 14,364,880
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,364,880
<EPS-BASIC> 1.28
<EPS-DILUTED> 1.27
<RESERVE-OPEN> 78,504,050
<PROVISION-CURRENT> 39,367,681
<PROVISION-PRIOR> (6,208,215)
<PAYMENTS-CURRENT> 14,827,517
<PAYMENTS-PRIOR> 19,218,634
<RESERVE-CLOSE> 77,617,365
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
