SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission file number: 0-2047
CAPITOL TRANSAMERICA CORPORATION
A Wisconsin Corporation 39-1052658
4610 University Avenue
Madison, Wisconsin 53705-0900
Registrant's telephone number, including area code (608) 231-4450
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $1 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 dur-
ing the preceding twelve months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing re-
quirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this form
10-K. { }
Based on the closing average of the bid (14 1/2) and asked price (19 1/2), the
aggregate market value of voting stock held by non-affiliates of the registrant
as of March 12, 1999 was approximately $190,885,605.
Indicate the number of shares of each of the issuer's class of common stock, as
of the latest practicable date:
At March 12, 1999
Common Stock, $1.00 Par Value
Issued: 11,535,761
Outstanding: 11,228,565
DOCUMENTS INCORPORATED BY REFERENCE
Schedule P of the Annual Statements of Capitol Indemnity Corporation and Capitol
Specialty Insurance Corporation are incorporated by reference into Part I. Por-
tions of the proxy statement for the annual shareholders meeting to be held
May 17, 1999 are incorporated by reference into Part III.
Total Pages: 39
Form 10-K (Annual Report)
Capitol Transamerica Corporation
Part I
Item 1. Business
(a) General Development of Business
Capitol Transamerica Corporation (CTC) is a holding company with assets
exceeding $277 million. CTC was formed in 1965 and owns 100% of Capitol
Indemnity Corporation (CIC), Capitol Specialty Insurance Corporation (CSIC)
and Capitol Facilities Corporation (CFC). Both CIC and CSIC are property
and casualty insurance companies. CIC writes a complete portfolio of
fidelity and surety bonds and specialty insurance coverages, while CSIC
has been largely inactive due to market conditions. CIC operates on an
admitted basis in thirty-six states and on an excess/surplus lines basis
in one state. CFC provides premium financing for the insurance companies.
Some of the specialty property and casualty coverages written are: Barber &
Beauty Shops, Bowling Alleys, Contractors/Manufacturers, Day Care Centers,
Deer Hunters Accident, Detective/Guard Agencies, Equipment Breakdown, Golf
Courses, Nurses Professional, Resorts/Campgrounds, Restaurants, Special
Events, Clubs, Sportsman's Accident, Tanning/Toning Salons and Taverns.
The full line of surety and fidelity bonds includes: Contractor's Perfor-
mance and Payment Bonds, License/Permit Bonds, Fiduciary Bonds, Judicial
Bonds and Commercial Fidelity Bonds.
The results of operations have remained most favorable since 1986 with sub-
stantial increases in premium volume, profitability and shareholders'
investment.
(b) Information about Industry Segments
General:
The subsidiaries of the Company, through licensed agents, are involved only
in the business of underwriting property, casualty, fidelity and surety in-
surance on selected risks. The Company conducts business with insurance
agents located throughout the United States. As of December 31, 1998 and
1997, no amount due from agents located in any one state exceeded 15% of
total balances; no industry segment other than insurance amounted to 10% or
more of the Company's gross or net income and no agent had writings in ex-
cess of 10% of the Company's gross premiums in 1998, 1997 or 1996. During
1998, 1997 and 1996, direct premiums written in Wisconsin accounted for
approximately 17%, 17% and 18%, respectively, and direct premiums written
in Illinois accounted for approximately 14%, 13% and 13%, respectively, of
the total direct premiums written by the Company. No other states exceeded
10%.
(c) Narrative Description of Business
Competitive Conditions:
All business written by the Company is highly competitive in the areas
of price, service and agent relationships. The large number of insurers
transacting business at rates which are independently regulated by their
respective insurance departments compete aggressively for desireable busi-
ness. Because of limitations in capacity and other regulatory restrictions,
companies the size of CIC are sometimes at a disadvantage when competing
with larger insurance companies.
CIC is required by the Insurance Commissioner of the State of Wisconsin to
maintain a minimum compulsory surplus (surplus as regards policyholders) of
25% of net premiums written during the preceding twelve months. As of
December 31, 1998, CIC reported $102.9 million in surplus as regards
policyholders, approximately $82.2 million in excess of the required
amount. In addition, CIC is required to report a minimum 60% loss and loss
expense ratio for the most current three years on certain liability lines
as well as a minimum 65% ratio on the workers compensation line. Based
upon actual historical experience the Company's ratios are substantially
less than the requirement and had the company not included the excess
statutory reserves over statement reserves in reporting to regulatory
authorities, surplus would have been $111.9 million at December 31, 1998.
Importance and Effect of Licenses:
Generally speaking, insurance companies must be licensed in the states in
which the insurance is written. Forms and rates for each policy offered are
filed with individual state insurance departments.
Number of Persons Employed:
Capitol Transamerica Corporation and subsidiaries employ approximately 200
people.
Information as to Similar Products or Services:
Gross premiums written, reinsurance ceded and net premiums written for the
past five years are as follows:
<TABLE>
<CAPTION>
1998
Gross Ceded Net
<S> <C> <C> <C>
Accident and Health $ 1,884,645 $1,596,313 $ 288,332
Burglary and Glass 4,897 - 4,897
Fidelity 1,172,166 50,915 1,121,251
Fire and Allied Lines 319,109 5,621 313,488
Inland Marine 828,791 714,331 114,460
Liability 9,669,318 136,386 9,532,932
Commercial Multiple Peril 49,502,961 1,914,558 47,588,403
Workers' Compensation 4,059,756 - 4,059,756
Surety 20,487,509 735,055 19,752,454
$87,929,152 $5,153,179 $82,775,973
<CAPTION>
1997
Gross Ceded Net
<S> <C> <C> <C>
Accident and Health $ 5,090,314 $4,817,208 $ 273,106
Burglary and Glass 4,189 - 4,189
Fidelity 1,230,700 22,697 1,208,003
Fire and Allied Lines 424,516 4,296 420,220
Inland Marine 1,076,850 953,052 123,798
Liability 10,967,296 143,567 10,823,729
Commercial Multiple Peril 52,132,045 1,599,619 50,532,426
Workers' Compensation 3,381,685 - 3,381,685
Surety 25,200,251 402,612 24,797,639
$99,507,846 $7,943,051 $91,564,795
<CAPTION>
1996
Gross Ceded Net
<S> <C> <C> <C>
Accident and Health $ 238,615 $ - $ 238,615
Burglary and Glass 32,189 - 32,189
Fidelity 1,317,643 25,958 1,291,685
Fire and Allied Lines 698,783 (271) 699,054
Inland Marine 987,201 2,802 984,399
Liability 13,048,828 130,503 12,918,325
Commercial Multiple Peril 48,790,958 1,027,117 47,763,841
Workers' Compensation 2,470,176 17,104 2,453,072
Surety 23,354,994 492,849 22,862,145
$90,939,387 $1,696,062 $89,243,325
<CAPTION>
1995
Gross Ceded Net
<S> <C> <C> <C>
Accident and Health $ 222,137 $ - $ 222,137
Burglary and Glass 52,045 - 52,045
Fidelity 1,355,259 66,854 1,288,405
Fire and Allied Lines 593,309 10,561 582,748
Inland Marine 76,325 3,208 73,117
Liability 10,575,070 430,641 10,144,429
Commercial Multiple Peril 41,254,997 1,451,561 39,803,436
Workers' Compensation 1,942,861 74,422 1,868,439
Surety 14,806,489 484,277 14,322,212
$70,878,492 $2,521,524 $68,356,968
<CAPTION>
1994
Gross Ceded Net
<S> <C> <C> <C>
Accident & Health $ 223,193 $ - $ 223,193
Burglary and Glass 50,646 - 50,646
Fidelity 1,059,233 90,495 968,738
Fire and Allied Line 797,229 43,821 753,408
Inland Marine 98,927 3,524 95,403
Liability 9,309,300 307,242 9,002,058
Reinsurance 22,359 - 22,359
Commercial Multiple Peril 37,639,679 994,496 36,645,183
Workers' Compensation 1,623,361 57,099 1,566,262
Surety 7,740,415 415,724 7,324,691
$58,564,342 $1,912,401 $56,651,941
</TABLE>
(d) Copies of "Schedule P" of the Annual Statements filed with State Regulatory
Authorities by CIC and CSIC are incorporated herein by reference and are
available upon request.
(e) Discussion Topics
The following discussion topics, if applicable, have been included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and/or the Notes to Consolidated Financial Statements and the
accompanying Schedules which appear elsewhere in this Annual Report:
(1) Reinsurance transactions which have a material effect on earn-
ings or reserves.
(2) Significant reserving assumptions including any recent changes.
(3) The nature of recent changes in the terms under which reinsur-
ance is ceded to other insurers.
(4) Changes in the mix of business, including but not limited to
changes in the location of business, geographic mix and types
of risks assumed.
(5) Changes in payment patterns due to portfolio loss transfers,
structured settlements and other transactions or circumstances.
(6) Unusually large losses or gains.
(f) Reconciliation of Loss and Loss Adjustment Expense Reserves:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balances as of January 1, $ 71,472,338 $ 47,702,363 $ 38,584,084
Reinsurance balances (594) 225,367 (45,321)
Net reserves 71,471,744 47,927,730 38,538,763
Incurred losses and loss adjustment expenses related to:
Current year 49,862,090 43,042,827 36,041,564
Prior years:
Direct losses (net of recoveries) 4,091,923 10,725,730 1,516,382
Direct loss adjustment expenses
(net of recoveries) (1,956,631) 2,141,661 1,901,083
Discontinued assumed reinsurance 379,732 5,218,184 1,706,747
Total prior years 2,515,024 18,085,575 5,124,212
Total incurred 52,377,114 61,128,402 41,165,776
Paid losses and loss adjustment expenses related to:
Current year 20,035,517 16,327,601 15,487,239
Prior years 26,370,166 21,160,666 16,245,614
Total paid 46,405,683 37,488,267 31,732,853
Other adjustments, net (40,895) (96,121) (43,956)
Net balance at December 31 77,402,280 71,471,744 47,927,730
Reinsurance balances 1,101,770 594 (225,367)
Balance at December 31, $ 78,504,050 $ 71,472,338 $ 47,702,363
(g) Loss Reserve Development Consolidated (in millions of dollars)
<CAPTION>
Year ended: 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for losses and loss
adjustment expense $ 14.2 $ 14.1 $ 14.5 $ 18.1 $ 19.3 $ 27.5 $ 38.5 $ 47.7 $ 71.5 $ 78.5
Re-estimated reserves:
One year later 15.3 15.0 19.5 21.2 25.5 33.8 43.4 65.8 75.1
Two years later 16.1 18.3 21.3 23.8 31.2 37.5 57.7 65.9 -
Three years later 18.1 19.9 22.7 28.3 33.5 51.4 56.2 - -
Four years later 19.2 21.3 25.9 30.7 43.6 48.2 - - -
Five years later 20.2 23.8 27.9 38.6 42.7 - - - -
Six years later 21.8 25.6 34.7 38.0 - - - - -
Seven years later 23.6 31.6 34.2 - - - - - -
Eight years later 28.6 31.7 - - - - - - -
Nine years later 29.1 - - - - - - - -
Cumulative deficiency (14.9) (17.6) (19.7) (19.9) (23.4) (20.7) (17.7) (18.2) (3.6)
Cumulative deficiency from
discontinued reinsurance
assumed operations (14.4) (13.8) (13.0) (11.8) (10.8) (9.7) (8.8) (7.3) (6.0)
Cumulative redundancy
(deficiency) from
continuing operations (0.5) (3.8) (6.7) (8.1) (12.6) (11.0) (8.9) (10.9) 2.4
Cumulative amount of liability paid through:
One year later 5.9 5.7 7.6 9.4 9.9 12.2 16.2 21.2 26.4
Two years later 8.7 10.1 12.7 14.1 17.2 21.4 26.6 34.6 -
Three years later 12.0 13.4 15.4 18.9 23.6 27.5 34.2 - -
Four years later 13.7 15.2 18.7 23.0 27.0 31.7 - - -
Five years later 14.6 17.5 21.6 25.0 28.7 - - - -
Six years later 15.9 19.7 22.8 26.5 - - - - -
Seven years later 17.9 20.6 23.9 - - - - - -
Eight years later 18.7 21.6 - - - - - - -
Nine years later 19.6 - - - - - - - -
This table does not present accident or policy year development data, which readers may be more accustomed to
analyzing. Conditions and trends that have effected development of the liability in the past may not necessarily
occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies
based on this table. There are no specific provisions for the effects of inflation or other factors which may cause a
future change in claim costs.
The company withdrew from the reinsurance assumed business in 1976; however, it remains involved with treaties
that cover certain risks which have had significant development industry-wide over the past several
years. Due to the nature of the assumed business, ultimate losses may, and often do, vary from current estimates.
See footnote 4(b) of the notes to the consolidated financial statements.
</TABLE>
(h) Reconciliation of Statutory to Generally Accepted Accounting Principles
(GAAP) reserves:
<TABLE>
<CAPTION>
Balance, December 31, as reported to For the Year Ended December 31,
Insurance Commissioner of the 1998 1997 1996
State of Wisconsin:
<S> <C> <C> <C>
- CIC $ 77,094,939 $ 71,117,787 $ 47,458,573
- CSIC 367,612 - -
Funds withheld from reinsurers, reclassified
to loss reserves on a GAAP basis 408,516 447,658 489,808
Reserve for return of disability premiums,
reclassified to loss reserves on a GAAP basis 24,064 18,686 14,820
GAAP adjustment to gross up reserves
for the effect of reinsurance 669,190 594 (225,367)
Other, net (60,271) (112,387) (35,471)
Balance, December 31, on a GAAP basis $ 78,504,050 $ 71,472,338 $ 47,702,363
</TABLE>
Item 2. Properties
Capitol Transamerica Corporation leases premises in the Pyare Square
building located at 4610 University Avenue, Madison, Wisconsin, 53705, as
follows:
Approximately 38,098 square feet occupying a portion of the 1st, 2nd,
6th, 9th and 10th floors and all of the 11th, 12th, 13th and 14th
floors. The term of the lease is from June 1, 1996 through May 31,
1999.
The Company also leases approximately 2,000 square feet of storage space
from the President of the Company in a personally owned warehouse at
terms as favorable as those available from unaffiliated third parties.
The Company also leases 1,190 square feet of office space in Las Vegas,
Nevada. The term of the lease is from November 1, 1996 to October 31,
1999.
Item 3. Legal Proceedings
Capitol Indemnity Corporation (CIC) is a defendant in certain lawsuits
involving complaints which demand damages and recoveries for claims and
losses allegedly related to risks insured by CIC. In the opinion of
management, such lawsuits are routine in that they result from the ordi-
nary course of business in the insurance industry. The reserves for losses
and loss adjustment expenses include management's estimates of the
probable ultimate cost of settling all claims involving lawsuits. Such
estimates are continually reviewed and updated. The reserves for losses
and loss adjustment expenses at December 31, 1998, are, in the opinion of
management, adequate to absorb claims arising from those routine legal
proceedings presently in process against the Company.
Item 4. Submission of Matters to a Vote of Shareholders
No matters were submitted to a vote of shareholders during the Company's
fourth fiscal quarter ended December 31, 1998.
Item 5. Market Information, Dividends and Other Information
On March 12, 1999, the approximate number of registered shareholders was 2,500.
CTC is publicly owned and traded on the National Over-the-Counter Market,
symbol CATA. The market price of the stock during 1998 was a low of 15 and a
high of 22 3/4 with the equivalent of 3,996,900 shares traded.
Quarterly high and low quoted prices are obtained from the National Association
of Securities Dealers are illustrated below.
<TABLE>
<CAPTION>
1998 1997
Quarter High Low Dividends High Low Dividends
<S> <C> <C> <C> <C> <C> <C>
First 22 1/4 19 3/4 $.07 27 3/8 20 1/8 $.17
Second 21 7/16 19 .07 27 1/2 19 1/4 .07
Third 22 3/4 16 3/4 .07 27 1/2 25 1/2 .07
Fourth 20 1/4 15 .07 28 1/8 21 .07
Year 22 3/4 15 $.28 28 1/8 19 1/4 $.38
For the period January 1 through March 12, 1999, the high ask price was 19 1/2
and the low bid price was 14 1/2. A regular cash dividend of $.07 per share
was paid on March 26, 1999, to shareholders of record on March 12, 1999.
Future dividend payments must be authorized by the Board of Directors and will be dependent on operating
results, capital requirements and the financial condition of the Company.
</TABLE>
Subsidiaries S.E.C. Form 10-K
Capitol Indemnity Corporation Copies of the Company's Annual
Capitol Specialty Insurance Corporation report filed with the SEC, in-
Capitol Facilities Corporation cluding exhibits, are available
by written request addressed to:
Independent Public Accountants
Paul J. Breitnauer
Ernst & Young LLP Vice President & Treasurer
111 East Kilbourn Avenue 4610 University Ave.
Milwaukee, Wisconsin 53202 Madison, Wisconsin 53705-0900
Transfer Agent and Registrar Annual Meeting
Firstar Trust Co. The Company's Annual Meeting
Corporate Trust Department will be held Monday, May 17,
1555 N. RiverCenter Drive 1999, 4:00 PM at the
Suite 301 Marriot Inn - Madison West
Milwaukee, Wisconsin 53212 1313 John Q. Hammond Drive
Middleton, Wisconsin 53562
Common Stock
Listed: OTC
Quoted: NASD (CATA)
Item 6. FIVE YEAR CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Gross Premiums Written $ 87,929,152 $ 99,507,846 $ 90,939,387 $ 70,878,492 $ 58,564,342
Net Premiums Written $ 82,775,973 $ 91,564,795 $ 89,243,325 $ 68,356,968 $ 56,651,941
Premiums Earned $ 88,629,476 $ 87,451,620 $ 77,347,319 $ 63,865,500 $ 52,461,456
Net Investment Income 9,119,936 8,580,713 7,155,382 6,635,123 5,359,606
Realized Investment Gains (Losses) 13,198,139 15,370,384 8,468,911 3,587,323 (106,188)
Other Revenues 113,005 36,801 382,130 144,866 118,353
Total Revenues 111,060,556 111,439,518 93,353,742 74,232,812 57,833,227
Losses and Loss Adjustment Expenses Incurred 52,377,114 61,128,402 41,165,776 34,099,463 27,536,054
Underwriting and Other Expenses 30,682,454 28,587,186 26,680,657 21,497,664 17,883,570
Total Losses Incurred and Expenses 83,059,568 89,715,588 67,846,433 55,597,127 45,419,624
Income from Operations Before Income Taxes 28,000,988 21,723,930 25,507,309 18,635,685 12,413,603
Income Tax Expense 8,577,075 6,532,051 7,158,151 4,705,279 3,166,363
Consolidated Net Income $ 19,423,913 $ 15,191,879 $ 18,349,158 $ 13,930,406 $ 9,247,240
Weighted Average Number of Shares Outstanding
- Basic 11,206,018 11,151,428 11,077,501 11,049,660 11,012,621
Weighted Average Number of Shares Outstanding
- Diluted 11,280,442 11,285,751 11,315,758 11,190,198 11,184,566
Income Per Share - Basic $ 1.73 $ 1.36 $ 1.66 $ 1.26 $ 0.84
Income Per Share - Diluted $ 1.72 $ 1.35 $ 1.62 $ 1.24 $ 0.83
Total Cash Dividends Per Share $ 0.28 $ 0.38 $ 0.33 $ 0.24 $ 0.27
Consolidated Net Income and Cash Dividends Stated
as a Ratio to Beginning Shareholders' Equity 16.2% 16.7% 23.8% 25.3% 18.6%
Year End Financial Position:
Assets $277,359,597 $286,682,275 $228,885,454 $176,730,156 $127,633,195
Shareholders' Investment 141,315,973 139,342,141 116,581,883 92,653,880 67,979,174
Book Value Per Share $ 12.59 $ 12.46 $ 10.50 $ 8.37 $ 6.15
Shares Outstanding 11,222,180 11,178,882 11,103,297 11,068,161 11,032,433
Insurance Operating Ratios (Statutory Basis):
Losses and Loss Adjustment Expenses to
Net Premiums Earned 59.4% 70.1% 53.5% 53.2% 52.3%
Underwriting Expenses to Net Premiums Written 35.6% 32.1% 33.5% 32.8% 32.4%
Combined Ratio 95.0% 102.2% 87.0% 86.0% 84.7%
A. M. BEST Rating A+ A+ A+ A+ A+
Superior Superior Superior Superior Superior
Prior years' information has been restated to reflect the December 31, 1996 three-for-two stock split effected as a 50%
stock dividend, and the December 28, 1995 ten percent stock dividend.
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
Capitol Transamerica Corporation (the "Company") is an insurance holding company
operating in 37 states which writes, through its subsidiaries, both property-
casualty and fidelity-surety insurance. The property-casualty segment accounts
for approximately 75% of the business written while the fidelity-surety segement
accounts for approximately 25% of the Company's business.
The underwriting cycles of the property-casualty insurance industry have been
characterized by peak periods of adequate rates, underwriting profits and lower
combined ratios, while the downward side of the cycle is characterized by in-
adequate rates, underwriting losses and, as a result, higher combined ratios.
The adequacy of premium rates is affected primarily by the severity and frequen-
cy of claims which in turn are affected by natural disasters, regulatory
measures and court decisions which continue to uphold the "deep pocket" theory
in awarding against insurance companies. Unfortunately for the insurance indus-
try, the trend of increasing price competition has continued as has the number
of significant natural disasters. This combination has resulted in a consider-
able reduction in underwriting profitability for the industry as a whole.
Adequate premium rates continue to be of concern to the Company and the
property-casualty insurance industry as a whole. Management 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 compe-
tition in the Company's niche market, has presented an unprecedented challenge
to management. The Company has responded to this challenge with increased mar-
keting efforts 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, the property-casualty insurance industry is in a
downward cycle. However, despite a decrease in premium writings, the Company
had a profitable year in 1998. The increased claim activity that the Company
experienced in 1997 has stabilized, as indicated by the decrease in the com-
bined ratio. The marketing strategy of expansion into new states and the
addition of compatible coverages continues to be the focus as the Company
approaches the new millenium.
Gross premiums written during 1998 were $87,929,152, compared with $99,507,846
in 1997 and $90,939,387 in 1996.
Premiums earned are recognized as net revenues after reduction for reinsurance
ceded and after establishment of the provision for the pro rata unearned portion
of premiums written. Net premiums earned in 1998 totaled $88,629,476, compared
with $87,451,620 and $77,347,319 in 1997 and 1996, respectively. The net un-
earned premium reserve was $41,541,432, $47,411,849 and $43,258,833 at each
yearend.
<TABLE>
<CAPTION>
1998 1997 1996
<S>
Gross Premiums Written $87,929,152 $99,507,846 $90,939,387
Reinsurance Ceded 5,153,179 7,943,050 1,696,062
Net Premiums Written $82,775,973 $91,564,796 $89,243,325
Net Premiums Earned $88,629,476 $87,451,620 $77,347,319
Net Unearned Premium Reserve $41,541,432 $47,411,849 $43,258,833
The large increase in ceded premiums in 1997 and 1998 is due to a new reinsur-
ance agreement entered into during 1997. CIC assumes and fully cedes certain
accident and health premiums while retaining a brokerage fee. Management be-
lieves the Company should not incur any net losses from this business.
The Company's underwriting results can be measured by reference to the combined loss and expense ratios. This
tabulation includes the operating results of the two subsidiary insurance companies on a statutory basis. Losses and loss
adjustment expenses are stated as a ratio of net premiums earned, while underwriting expenses are state as a ratio of net
premiums written. The combined ratios were as follows:
<CAPTION>
Insurance Operating Ratios (Statutory Basis): 1998 1997 1996
<S> <C> <C> <C>
Losses and Loss Adjustment Expenses 59.4% 70.1% 53.5%
Underwriting Expenses 35.6% 32.1% 33.5%
Combined Ratios 95.0% 102.2% 87.0%
The Companys' combined ratio continues to compare favorably with the industry average, which is
projected to be 105% for the year 1998.
</TABLE>
REINSURANCE
The Company follows the customary practice of reinsuring with other companies,
i.e., ceding a portion of its exposure on the policies it has written. This pro-
gram of reinsurance permits the Company greater diversification of business and
the ability to write larger policies while limiting the extent of its maximum
net loss. It provides protection for the Company against unusually serious
occurrences in which a number of claims could produce a large aggregate loss.
Management continually monitors the Company's reinsurance program to obtain pro-
tection that should be adequate to ensure the availability of funds for losses
while maintaining future growth.
NET INVESTMENT INCOME AND REALIZED GAINS
The Company's fixed maturities and equity securities are classified as
available-for-sale and are carried at fair value. The unrealized gains and
losses, net of tax, are reported as a separate component of shareholders'
investment.
Interest and Dividend Income: Interest on fixed maturities is recorded as in-
come when earned and is adjusted for any amortization of purchase premium or
accretion of discount. Dividends on equity securities are recorded as income on
ex-dividend dates.
<TABLE>
<CAPTION>
Investments: 1998 1997 1996
<S> <C> <C> <C>
Invested Assets $238,140,592 $245,644,042 $184,801,846
Net Investment Income 9,119,936 8,580,713 7,155,382
Percent of Return to
Average Carrying Value 4.5% 4.9% 5.1%
Realized Gains 13,198,139 15,370,384 8,468,911
Change in Unrealized Gains $(21,787,587) $ 16,746,284 $ 12,672,783
The net decrease in unrealized gains of $21,787,587 for 1998 was comprised of a $2,214,372 increase in fixed maturities and
a decrease of $24,001,959 in equity securities.
Net investment income in 1998 amounted to $9,119,936, compared with $8,580,713 and $7,155,382 in 1997 and 1996, respectively.
Unrealized gains were $27,722,374, $49,509,958 and $32,763,674 at each respective year end.
</TABLE>
INCOME TAXES
Income tax expense is based on income reported for financial statement purposes
and tax laws and rates in effect for the years presented. Deferred federal in-
come taxes arise from timing differences between the recognition of income de-
termined for financial reporting purposes and income tax purposes. Such timing
differences are related principally to the deferral of policy acquisition costs,
the recognition of unearned premiums, and discounting the claims reserves for
tax purposes. Deferred taxes are also provided on unrealized gains and losses.
LOSS RESERVES
Reserves for losses and loss adjustment expenses reflect the Company's best
estimate of the liability for the ultimate cost of reported claims and incurred
but not reported (IBNR) claims as of the end of each period. The estimates are
based on past claim experience and consider current claim trends as well as
social and economic conditions. The Company's reserves for losses and loss ad-
justment expenses were $78,504,050 at December 31, 1998 compared with
$71,472,338 at December 31, 1997. This increase is a combination of giving con-
sideration for increases in premium volume, increased retention on all lines
of coverages written and an increase in the IBNR reserves. Management continues
to closely monitor the reserve development trends and projections as it attempts
to stabilize the loss reserve development which has occurred in recent years.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the Company's ability to meet obligations as they become
due. The obligations and cash outflow of the Company include claim settlements,
acquisition and administrative expenses, investment purchases and dividends to
shareholders. In addition to satisfying obligations and cash outflow through
premium collections, there is cash inflow obtained from interest and dividend
income, maturities and sales of investments. Because cash inflow from premiums
is received in advance of cash outflow required to settle claims, the Company
accumulates funds which it invests pending liquidity requirements. Therefore,
investments represent the majority (85.9% in 1998, 85.7% in 1997 and 80.7% in
1996) of the Company's assets. Cash outflow can be unpredictable for two
reasons: first, a large portion of liabilities representing loss reserves have
uncertainty regarding settlement dates; and second, there is potential for
losses occurring either individually or in the aggregate. As a result, the Com-
pany maintains adequate short-term investment programs necessary to ensure the
availability of funds. The investment program is structured so that a forced
sale liquidation of fixed maturities should not be necessary during the course
of ordinary business involvement and activities. The Company has no material
capital expenditure commitments.
MARKET RISK
Market risk is defined by the Securities Exchange Commission as exposure to ad-
verse fluctuations in interest rates and commodity or other price changes. The
Company does not invest in derivatives or similar financial instruments which
are highly sensitive to market risk and which are the main focus of the new re-
quirements. However, the requirements are broad enough in scope to encompass
the potential impact of interest rate fluctuations on the Company's fixed in-
come portfolio, as well as the potential impact of a severe drop in the stock
market on the Company's common stock portfolio.
The following table shows the interest rate sensitivity of the Company's fixed
income investments (bonds and preferred stock) by presenting the projected im-
pact of a parallel rise or decline in interest rates of 100 and 200 basis
points. The interest rate fluctuation is assumed to have occurred on January 1,
1999 and remain in effect for the life of the fixed income portfolio.
<TABLE>
Basis Point Increase/(Decrease)
<CAPTION>
Current Mkt
Portfolio Characteristics (200) (100) Rate 100 200
<S> <C> <C> <C> <C> <C>
Market Value ($000's) $90,664 $87,044 $82,913 $70,576 $74,155
Mkt Value/Statement Value (%) 119.7% 114.9% 109.5% 103.7% 97.9%
Effective Duration (years) 3 4 4 4 4
The valuation of the Company's common stock portfolio is subject to equity price risk. Based on a similar drop
in the Dow Jones industrial average in 1998, a decrease in market prices of 10% would reduce the fair value of
the Company's common stock portfolio approximately $16.5 million, from $135.4 million to $118.9 million.
The Company's investment portfolio is actively managed to minimize downward price risk.
</TABLE>
YEAR 2000
A significant issue facing not only the insurance industry but society as a
whole is potential problems related to the approaching year 2000. Older
computer programs were written using two digits rather than four to define the
applicable year. As a result, those computer programs may misinterpret a
date, using "00" as the year 1900 rather than year 2000.
Over the past three years the Company has incurred approximately $2.3 million
of expenses in updating its mangement system to alleviate potential year 2000
problems. This process is substantially completed, with only final testing and
minor adjustments remaining. The additional expense for the testing and ad-
justments is expected to be less than $100,000. As a result of these efforts,
the Company is confident that the year 2000 will not cause a significant dis-
ruption to its business.
The Company has also assessed the potential impact of year 200 related problems
that may be encountered by our agents and third parties, and determined that
any impact would not be material relative to the operations of the Company.
However, there can be no guarantee that actual results would not differ
materially from those anticipated; therefore, the Company has developed a con-
tingency plan in the event of a worst-case scenario.
Item 8. Financial Statements and Supplementary Data
Financial Statements
The financial statements filed by CTC in connection with this Annual
Report are consolidated financial statements which present all of the
operations of the parent company and its subsidiaries.
(1) Capitol Transamerica Corporation Consolidated Financial Statements:
(2) Report of independent auditors.
(3) Consolidated balance sheets - December 31, 1998 and 1997.
(4) Consolidated statements of income - for each of the three years
in the period ended December 31, 1998.
(5) Consolidated statements of shareholders' investment and compre-
hensive income- for each of the three years in the period ended
December 31, 1998.
(6) Consolidated statements of cash flows - for each of the three
years in the period ended December 31, 1998.
(7) Notes to consolidated financial statements.
Item 9. Disagreements of Accounting and Financial Disclosures
None.
Item 10. Directors and Executive Officers of CTC
Part III
(a) Directors
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name (Age) Other Directorships, Business Expire at
Date of Original Election Principal Occupation Experience and Miscellaneous Information Annual Mtg. in:
Paul J. Breitnauer (59) Vice President and Treasurer of Mr. Breitnauer has been associated with 1999
1986 the Company; Senior Vice Presi- the insurance industry in various
dent & Treasurer of CIC, CSIC capacities since 1963.
and CFC, wholly-owned subsidi-
aries of the Company.
Sun Prairie, Wisconsin
George A. Fait (72) Chairman of the Board and Mr. Fait is a director of Bank One and 2000
1960 President of the Company and its has been associated with the insur-
wholly-owned subsidiaries; Di- ance industry in various capacities
rector of Bank One. since 1950.
Madison, Wisconsin
Larry Burcalow (57) Owner & President Mr. Burcalow has been Owner and President 2001
1997 Yahara Materials, Inc. of Yahara Materials, Inc. for over 30
Waunakee, Wisconsin years.
Michael J. Larson (57) Retired, formerly with Mr. Larson has been associated with the 2001
1991 American National Bank banking industry in various capacities
Madison, Wisconsin since 1965.
Reinhart H. Postweiler(69)Retired, formerly with Flad Mr. Postweiler is a Director of Bank One. 1999
1977 Affiliated Corporation; Director He is a member of the Wisconsin Society of
of Bank One, Madison, Wisconsin. Professional Engineers and the National
Society of Professional Engineers.
Kenneth P. Urso (64) Owner & Operator Mr. Urso has been in the insurance 2000
1997 Urso & Associates, LLC business for over 30 years.
Madison, Wisconsin
None of the above directors are related and there are no arrangements or understandings
between directors since each is acting solely in their described capacity. There have been
no events during the past five years which are material to the evaluation of the ability
and integrity of any director of CTC.
</TABLE>
Item 10. (continued)
(b) Executive Officers:
Chairman of the Board and President- George A. Fait (72 years of age)
Elected in 1960. Chairman of the Board and President - CIC, CSIC and
CFC, wholly-owned subsidiary companies.
Vice President and Treasurer - Paul J. Breitnauer (59 years of age)
Elected Treasurer in 1970 and Vice President in 1982. Senior Vice
President and Treasurer - CIC, CSIC and CFC.
Secretary - Virgiline M. Schulte (70 years of age)
Elected in 1988. Secretary - CIC, CSIC and CFC.
(c) Additional Executive Officers -
CIC & CSIC - Wholly-Owned Subsidiary Insurance Companies:
Vice President - P & C Claims Vice President - Personnel
Robert F. Miller (60 years of age) Virgiline M. Schulte (70 years
Elected in 1986. old) Elected in 1993.
Vice President - Agency Vice President- Data Processing
Joel G. Fait (40 years of age) Frank S. Zillner (37 years old)
Elected in 1993. Elected in 1993.
Vice President - Rating Corporate Counsel
Vacant Vacant
Vice President - P & C Underwriting Vice President-F&S Underwriting
Vacant Jess J. Wadle
(d) Disclosure of Delinquent Filers
The section captioned "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Capitol Transamerica Corporation ("CTC")
Proxy Statement dated April 9, 1999 is incorporated herein by
reference.
Item 11. Executive Compensation and Transactions
The sections captioned "Compensation of Directors", "Report on Executive
Compensation" and "Executive Compensation Committee Report" in the CTC
Proxy Statement dated April 9, 1999 are incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The sections captioned "Principal Shareholders", "Option/SAR Exercised in
Last Fiscal Year" and "Compensation Plans" in the CTC Proxy Statement
dated April 9, 1999 are incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The section captioned "Compensation Committee Interlocks and Insider
Participation" and the three sections referenced in Item 11 above,
all included in the CTC Proxy Statement dated April 9, 1999, are in-
corporated herein by reference.
George Fait and Virgiline Schulte are brother and sister; Joel Fait is
George Fait's son and Frank Zillner is his son-in-law; none of the other
officers are related and there are no arrangements or understandings
between officers since each is acting solely in their described capacity.
There have been no events during the past five years which are material
to the evaluation or the ability and integrity of any executive officer
of the Company or its subsidiaries.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1 and 2. Financial statements and financial statement schedules
The following financial statements of Capitol Transamerica Corporation
and Subsidiaries are included in Item 8.
Consolidated balance sheets - December 31, 1998 and 1997.
Consolidated statements of income - for each of the three years
in the period ended December 31, 1998.
Consolidated statements of shareholders' investment and compre-
hensive income - for each of the three years in the period end-
ed December 31, 1998.
Consolidated statements of cash flows - for each of the three
years in the period ended December 31, 1998.
Notes to consolidated financial statements.
The following financial statement schedules of Capitol Transamerica
Corporation and Subsidiaries are included in Item 14(d).
Schedule I Summary of Investments Other than Investments in
Related Parties
Schedule II Condensed Financial Information of Registrant - Parent
Company
Schedule III Supplementary Insurance Information
Schedule IV Reinsurance
Schedule VI Supplemental Information Concerning Property-Casualty
Insurance Operations
All other schedules required by Article 7 of Regulation S-K are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
(b) No Reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended December 31, 1998.
(c) Exhibits
None
(d) Financial Statement Schedules
Reference is made to the financial statement schedules above.
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CAPITOL TRANSAMERICA CORPORATION
By By
George A. Fait Paul J. Breitnauer
Chairmant of the Board, Vice President,
President and Director Treasurer and Director
By By
Virgiline M. Schulte Larry Burcalow
Secretary Director
By By
Michael J. Larson Reinhart H. Postweiler
Director Director
By
Kenneth P. Urso
Director
March 25, 1999
RESPONSIBILITY FOR FINANCIAL REPORTING
To The Shareholders and Board of Directors of Capitol Transamerica Corporation:
The Company has prepared the consolidated financial statements, related notes,
and other financial data appearing in this Annual Report. The statements were
developed using generally accepted accounting principles and policies considered
appropriate in the circumstances. They reflect, where applicable, management's
best estimates and judgements. The financial data also includes disclusures and
explanations which are relevant to an understanding of the financial affairs of
the Company.
To meet management's responsibility for financial reporting, internal control
systems and procedures are designed to provide reasonable assurances as to the
reliability of the financial records and compliance with corporate policy
throughout the organization.
Ernst & Young LLP, independent auditors, have audited the financial statements.
To express an opinion thereon, they review and evaluate the Company's internal
accounting controls and conduct such tests of the accounting records and other
auditing procedures as they deem necessary. The Board of Directors oversees the
Company's financial reporting through its Audit Committee, which regularly meets
with management representatives and jointly with the independent auditors, to
review accounting, auditing and financial reporting matters. A policy of busines
ethics is communicated annually to the Company's directors, officers and respon-
sible employees. The Company monitors compliance with the policy to help assure
that operations are conducted in a responsible and professional manner with a
committment to the highest standard of business conduct.
Paul J. Breitnauer
Vice President and Treasurer
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Capitol Transamerica Corporation:
We have audited the accompanying consolidated balance sheets of Capitol Trans-
america Corporation (the "Company") as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders investment and compre-
hensive income and cash flows for the three years in the period ended December
31, 1998. Our audits also included the financial statement schedules listed in
the Index at Item 14(a). These financial statements and schedules are the re-
sponsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Capitol
Transamerica Corporation at December 31, 1998 and 1997, and the consolidated re-
sults of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Milwaukee, Wisconsin Ernst & Young LLP
February 19, 1999
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Assets
Investments (Notes (1)(b) and (2)):
Available-for-sale investment securities, at fair value
Fixed maturities (amortized cost $68,210,546 and $69,434,974 respectively) $ 75,061,460 $ 74,071,516
Equity securities:
Common stock, (cost $115,583,088 and $101,409,300, respectively) 135,373,036 145,208,469
Nonredeemable preferred stock, (cost $6,769,703 and
$5,854,291, respectively) 7,851,215 6,928,541
Investment real estate, at cost, net of depreciation 9,999,919 8,122,638
Short-term investments, at cost which approximate fair value (Note(2)(d) 9,854,962 11,312,878
Total Investments 238,140,592 245,644,042
Cash 1,544,438 1,202,548
Accrued investment income 1,678,998 1,707,692
Receivables from agents, insureds and others, less allowance
for doubtful accounts of $500,000 and $440,000, respectively 17,217,646 20,820,481
Balances due from reinsurers 913,186 122,916
Funds held by ceding reinsurers 35,756 -
Deferred insurance acquisition costs (Note (1)(e)) 13,524,777 14,186,941
Prepaid reinsurance premiums 727,074 743,988
Due from securities brokers 1,633,833 -
Income taxes recoverable 141,982 684,342
Other assets 1,801,315 1,569,325
Total Assets $277,359,597 $286,682,275
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<CAPTION>
1998 1997
Liabilities
<S> <C> <C>
Policy Liabilities and Accruals (Notes (1)(d), (3) and (4)):
Reserve for losses $ 55,336,376 $ 48,570,173
Reserve for loss adjustment expenses 23,167,674 22,902,165
Unearned premiums 41,541,432 47,411,849
Total Policy Liabilities and Accruals 120,045,482 118,884,187
Accounts payable 3,340,980 2,822,208
Claim drafts outstanding 2,836,566 2,983,360
Due to securities brokers 231,185 5,318,372
Balances due to reinsurers 1,038,967 1,337,564
Accrued premium taxes 237,171 337,163
State income taxes payable 91,444 -
Deferred income taxes (Notes (1)(f) and (5)) 8,221,829 15,657,280
Total Other Liabilities 15,998,142 28,455,947
Total Liabilities 136,043,624 147,340,134
Commitments and contingent liabilities (Notes (4) and (8)) - -
Shareholders' Investment (Notes (6) and (7))
Common stock, $1.00 par value, authorized 15,000,000 shares,
issued 11,529,376 and 11,502,520, respectively 11,529,376 11,502,520
Paid-in surplus 22,246,366 21,832,206
Accumulated other comprehensive income, net of deferred taxes of
$9,702,829 & $16,833,386, respectively(Notes(1)(b)&(2) 18,019,545 32,676,572
Retained earnings 90,016,245 73,732,118
Shareholders' investment before treasury stock 141,811,532 139,743,416
Treasury stock, 307,196 and 323,638 shares, respectively, at cost (495,559) (401,275)
Total Shareholders' Investment 141,315,973 139,342,141
Total Liabilities and Shareholders' Investment $277,359,597 $286,682,275
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
<CAPTION>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
<S> <C> <C>
Revenues:
Premiums earned (Note (1)(c)) $ 88,629,476 $ 87,451,620 $ 77,347,319
Net investment income (Note (2)(e)) 9,119,936 8,580,713 7,155,382
Realized investment gains (Notes (1)(b) and (2)) 13,198,139 15,370,384 8,468,911
Other revenues 113,005 36,801 382,130
Total Revenues 111,060,556 111,439,518 93,353,742
Losses and Expenses Incurred (Notes (1)(d), (3) and (4)):
Losses incurred 43,994,221 49,055,296 29,694,168
Loss adjustment expenses incurred 8,382,893 12,073,106 11,471,608
Underwriting, acquisition and insurance expenses (Note(10)) 28,558,650 28,458,021 29,136,689
Decrease (Increase) in deferred insurance acquisition costs 662,164 (1,208,627) (3,749,446)
Other expenses 1,461,640 1,337,792 1,293,414
Total Losses and Expenses Incurred 83,059,568 89,715,588 67,846,433
Income from operations before income taxes 28,000,988 21,723,930 25,507,309
Income tax expense (Note (5)) 8,577,075 6,532,051 7,158,151
Net Income $ 19,423,913 $ 15,191,879 $ 18,349,158
Income Per Share- basic (Note (1)(g)) $ 1.73 $ 1.36 $ 1.66
Weighted avg. number of shares outstanding-basic (Note (1)(g)) 11,206,018 11,151,428 11,077,501
Income Per Share- diluted (Note (1)(g)) $ 1.72 $ 1.35 $ 1.62
Weighted avg. number of shares outstanding-diluted (Note (1)(g)) 11,280,442 11,285,751 11,315,758
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT AND COMPREHENSIVE INCOME
For the Years Ended December 31, 1996, 1997 and 1998
Common
Common Stock Accumulated
Stock Distributable Other
(Par Value) (Par Value Paid-In Comprehensive Comprehensive Retained Treasury
$1.00) $1.00) Surplus Income Income Earnings Stock
<S> <C> <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)
Comprehensive income
Net income - - - 18,349,518 - 18,349,158 -
Other comprehensive income
Unrealized appreciation on
available-for-sale securities,
net of deferred taxes - - - 13,953,518 - - -
Less: reclassification adjust-
ment, net of tax of $2,879,430
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 dividend 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)
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
Net income - - - 19,423,913 - 19,423,913 -
Other comprehensive income
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 income - - - (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)
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
<CAPTION>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net Income $ 19,423,913 $ 15,191,879 $ 18,349,158
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,195,955 1,018,894 805,784
Realized investment gains (13,198,139) (15,370,384) (8,468,911)
Change in:
Deferred insurance acquisition costs 662,164 (1,208,627) (3,749,446)
Unearned premiums (5,870,417) 4,153,016 11,703,105
Allowance for doubtful accounts receivable from agents 60,000 60,000 60,000
Accrued investment income 28,694 (22,752) 33,314
Receivables from agents, insureds and others 3,542,835 (2,168,094) (6,898,262)
Balances due to/from reinsurers (191,361) (284,774) (136,449)
Reinsurance recoverable on paid and unpaid losses (897,506) 755,956 (151,080)
Funds held by ceding reinsurers (35,756) 44,791 32,326
Income taxes payable/receivable 633,804 (2,554,594) 1,980,343
Deferred income taxes (304,896) (78,292) (68,247)
Due to/from securities brokers (6,721,020) 11,191,845 (6,028,431)
Prepaid reinsurance premiums 16,914 (39,840) 192,901
Other assets (5,305) 339,684 (123,731)
Reserves for losses and loss adjustment expenses 7,031,712 23,769,975 9,118,279
Accounts payable 371,977 (806,814) 2,250,075
Accrued premium taxes (99,992) (225,410) 180,029
Net cash provided by operating activities 5,643,576 33,766,459 19,080,757
Cash flows provided by (used for) investing activities:
Proceeds from sales of available-for-sale investments 40,484,195 44,747,214 27,579,131
Purchases of available-for-sale investments (49,573,482) (78,773,489) (49,010,584)
Maturities of available-for-sale investments 7,660,719 5,064,056 6,917,920
Purchases of depreciable assets (1,080,065) (477,992) (1,279,331)
Net cash used for investing activities (2,508,633) (29,440,211) (15,792,864)
Cash flows provided by (used for) financing activities:
Cash dividends paid (3,139,786) (4,226,165) (3,699,525)
Stock options exercised 265,799 626,022 189,650
Net proceeds from sale (purchase) of treasury stock 80,934 111,449 (15,799)
Net cash used for financing activities (2,793,053) (3,488,694) (3,525,674)
Net (decrease) increase in cash 341,890 837,554 (237,781)
Cash, beginning of year 1,202,548 364,994 602,775
Cash, end of year $ 1,544,438 $ 1,202,548 $ 364,994
Cash paid during the year for:
Income taxes $ 8,358,132 $ 9,164,506 $ 5,292,665
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Capitol Transamerica Corporation (the "Company") is an insurance holding
company which writes, through its subsidiaries, commercial insurance
coverages in 37 states. The property-casualty insurance coverages represent
approximately 75% of the Company's premiums written while fidelity-surety
coverages represent approximately 25% of the Company's premiums written. The
Company's products are marketed through independent agents located through-
out the United States.
The consolidated financial statements are presented in accordance with
generally accepted accounting principles. The preparation of financial
statements of insurance companies requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ significantly from those
estimates.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Capitol Indemnity Corpora-
tion ("CIC"), Capitol Specialty Insurance Corporation ("CSIC") and
Capitol Facilities Corporation ("CFC"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
(b) Investments
The Company classifies all of its fixed maturities and equity securi-
ties as available-for-sale. Accordingly, investments in fixed maturi-
ties and equity securities are reported at fair value, with unrealized
gains and losses reported in a separate component of shareholders'
investment, net of tax effect. The cost of fixed maturities is adjust-
ed for amortization of premiums and accretion of discounts to maturi-
ty. 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 $789,597 and $444,381 as of December 31, 1998 and December
31, 1997, respectively. The real estate is depreciated over the esti-
mated useful life of the asset.
Cost of investments sold is determined under the specific identifica-
tion method.
(c) Premiums
Premiums are recognized as revenue on a pro rata basis over the term
of the contracts. Approximately 17% and 14% of the total premiums
written are on risks located in Wisconsin and Illinois, respectively.
No other state exceeds 10%.
(d) Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses, less related reinsurance and sub-
rogation recoverable, are provided for as claims are incurred. The
reserves for losses and loss adjustment expenses include: (1) the
accumulation of individual estimates for claims reported on direct
business prior to the close of the accounting period; (2) estimates
received from other insurers with respect to reinsurance assumed; (3)
estimates for incurred but not reported claims based on past experi-
ence modified for current trends; and (4) estimates of expenses for
investigating and settling claims based on past experience. The lia-
bilities recorded are based on estimates resulting from the continu-
ing review process, and differences between estimates and ultimate
payments are reflected in expense for the period in which the esti-
mates are changed.
(e) Deferred Insurance Acquisition Costs
Insurance acquisition costs that vary with, and are directly related
to, the production of premiums(principally commissions, premium taxes
compensation and certain underwriting expenses) are deferred. Deferred
insurance acquisition costs are amortized to expense as the related
premiums are earned.
(f) Income Taxes
Deferred income taxes reflect the net tax effects of temporary dif-
ferences between the carrying amounts of assets and liabilities for
financial statement purposes and the amounts used for income tax
reporting.
(g) Income Per Share
Net income per share is computed by dividing net income by the weight-
ed average number of shares of stock outstanding during the year.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 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>
December 31,
1998 1997 1996
<S> <C> <C> <C>
Numerator:
Consolidated net income $19,423,913 $15,191,879 $18,349,158
Denominator:
Denominator for basic EPS- weighted avg shares 11,206,018 11,151,428 11,077,501
Effect of dilutive securities- employee stock options 74,424 134,323 238,257
Denominator for diluted EPS 11,280,442 11,285,751 11,315,758
Basic EPS $ 1.73 $ 1.36 $ 1.66
Diluted EPS $ 1.72 $ 1.35 $ 1.62
(2)Investments
(a) The amortized cost and estimated fair value of fixed maturities and
equity securities are as follows:
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Type of investment Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1998
Fixed maturities:
U.S. Government bonds $ 51,204 $ 4,146 $ - $ 55,350
State, municipal and political
subdivision bonds 67,339,664 6,845,376 (3,039) 74,182,001
Corporate bonds and notes 819,678 11,211 (6,780) 824,109
Total fixed maturities $ 68,210,546 $ 6,860,733 (9,819) $ 75,061,460
Equity securities:
Common stock $115,583,088 $ 30,815,779 $(11,025,831) $135,373,036
Non-redeemable preferred stock 6,769,703 1,357,227 (275,715) 7,851,215
Total equity securities $122,352,791 $ 32,173,006 $(11,301,546) $143,224,251
December 31, 1997
Fixed maturities:
U.S. Government bonds $ 67,192 $ 4,883 $ - $ 72,075
State, municipal and political
subdivision bonds 68,651,060 4,592,852 (4,408) 73,239,504
Corporate bonds and notes 716,722 47,106 (3,891) 759,937
Total fixed maturities $ 69,434,974 $ 4,644,841 $ (8,299) $ 74,071,516
Equity securities:
Common stock $101,409,300 $ 46,194,740 $ (2,395,571) $145,208,469
Non-redeemable preferred stock 5,854,291 1,099,250 (25,000) 6,928,541
Total equity securities $107,263,591 $ 47,293,990 $ (2,420,571) $152,137,010
(b) The amortized cost and estimated fair value of fixed maturities at December 31, 1998, by contractual maturity, is
shown below. Expected maturities will differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 245,000 $ 248,802
Due after one year through five years 2,763,848 2,931,642
Due after five years through ten years 7,355,359 7,940,756
Due after ten years 57,846,339 63,940,260
Total $68,210,546 $75,061,460
(c) Realized gains (losses) and change in unrealized gains (losses) for the three years ended December 31, 1998,
1997 and 1996, are as follows:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Realized gains (losses):
Fixed maturities
Gross gains $ 64,575 $ 53,584 $ 88,664
Gross losses (5,040) (7,250) (36,388)
Equity securities
Gross gains 13,138,613 15,323,242 8,454,726
Gross losses (9) - (22,041)
Other - 808 (16,050)
Net realized gains $ 13,198,139 $ 15,370,384 $ 8,468,911
Change in unrealized gains (losses):
Fixed maturities $ 2,214,372 $ (123,135) $ (2,416,907)
Equity securities (24,001,959) 16,869,422 15,089,690
Net change in unrealized gains (21,787,587 16,746,287 12,672,783
Effect of applicable deferred taxes 7,130,560 (5,693,740) (4,308,746)
Net (decrease) increase in unrealized
gains $(14,657,027) $ 11,052,547 8,364,037
Following is a summary of total unrealized gains (losses) as of December 31, 1998, 1997 and 1996:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Unrealized gains (losses):
Fixed maturities
Gross unrealized gains $ 6,860,733 $ 4,644,841 $ 4,785,917
Gross unrealized losses (9,819) (8,299) (26,240)
Equity securities
Gross unrealized gains 32,173,006 47,293,990 29,775,195
Gross unrealized losses (11,301,546) (2,420,571) (1,771,198)
Gross unrealized gains 27,722,374 49,509,961 32,763,674
Effect of applicable deferred taxes (9,702,829) (16,833,389) (11,139,649)
Net unrealized gains $18,019,545 $32,676,572 $21,624,025
</TABLE>
(d) The amortized cost of securities on deposit with insurance regulators
in accordance with statutory requirements was $3,670,000 on December
31, 1998 and $3,689,284 on December 31, 1997.
In connection with the runoff of the reinsurance assumed operations, CIC
has established a security trust fund agreement with a bank, consisting
of cash and securities in the amount of $835,000 at December 31, 1998
and $832,192 at December 31, 1997.
(e) Following is a summary of investment income from each category of
investments:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Fixed maturities $ 4,619,471 $ 4,800,978 $ 4,936,902
Equity securities 3,907,213 3,292,615 2,260,094
Investment real estate 2,383,255 2,340,878 1,280,669
Short-term 186,341 149,879 119,542
Total investment income 11,096,280 10,584,350 8,597,207
Investment expenses - real estate 1,310,113 1,361,092 945,777
Other investment expenses 321,016 401,994 419,201
Depreciation on real estate 345,215 240,551 76,847
Net investment income $ 9,119,936 $ 8,580,713 $ 7,155,382
</TABLE)
(f) The Company had investments in state, municipal and political subdivi-
sion bonds with amortized costs of $67,339,664 and $68,651,062 at De-
cember 31, 1998 and 1997, respectively. Approximately 92% of these
bonds were special assessment revenue bonds and approximately 8% of
these bonds were state and political subdivision obligations at Decem-
ber 31, 1998 and 1997. The Company monitors its exposure by investing
its funds in accordance with guidelines set by the Company's investment
committee. At December 31, 1998, approximately 45% of the municipal
bond portfolio consisted of securities of Wisconsin and Minnesota muni-
cipalities. No other state total exceeded 10%.
(g) Fair values for fixed maturities and equity securities are determined
from quoted market prices where available, or are estimated using values
obtained from independent pricing services. Thinly traded fixed maturi-
ties are individually priced based upon year-end market conditions, type
of security, interest rate and maturity of the issue.
(3) Reserves for Losses and Loss Adjustment Expenses
The table below provides a reconciliation of the beginning and ending re-
serves for losses and loss adjustment expenses, net of reinsurance:
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance as of January 1, $71,472,338 $47,702,363 $38,584,084
Reinsurance balances (594) 225,367 (45,321)
Net reserves 71,471,744 47,927,730 38,538,763
Incurred losses and loss adjustment expenses related to:
Current year 49,862,090 43,042,827 36,041,564
Prior years:
Direct losses (net of ceded) 4,091,923 10,725,730 1,516,382
Direct loss adjustment expenses (net of ceded) (1,956,631) 2,141,661 1,901,083
Discontinued assumed reinsurance 379,732 5,218,184 1,706,747
Total prior years 2,515,024 18,085,575 5,124,212
Total incurred 52,377,114 61,128,402 41,165,776
Paid losses and loss adjustment expenses related to:
Current year 20,035,517 16,237,601 15,487,239
Prior years 26,370,166 21,160,666 16,245,614
Total paid 46,405,683 37,488,267 31,732,853
Other adjustments, net (40,895) (96,121) (43,956)
Net balance at December 31, 77,402,280 71,471,744 47,927,730
Plus (less) reinsurance balances 1,101,770 594 (225,367)
Balance at December 31, $78,504,050 $71,472,338 $47,702,363
As explained in Note (1)(d), differences between estimates and ultimate payments are reflected in expense for the period
in which the estimates are changed. The Company continually reviews its reserves for losses and loss adjustment expenses
and the related reinsurance recoverables. As a result of the variability in these estimates, reserves have differed from
actual experience during 1998, 1997 and 1996. The estimates are based on past claim experience and consider current
claim trends as well as social and economic conditions. During 1997 it was determined that, due to increased claim de-
velopment on all lines of business, a substantial increase in incurred but no reported (IBNR) reserves was necessary.
The Company increased IBNR reserves by $10.0 million on direct business and $4.5 million on assumed reinsurance. The
Company increased IBNR reserves an additional $5.9 million in 1998. While the Company has recorded its best estimate of
its reserves for losses and loss adjustment expenses, it is reasonably possible these estimates, net of estimated rein-
surance recoverables, may increase in the future. See Note 4(b) for discussion of assumed reinsurance.
</TABLE>
(4) Reinsurance
(a)Ceded
From 1996 through 1998, the Company generally reinsured losses in excess
of $1,000,000 with various other companies through reinsurance ceded
contracts. These arrangements provide for greater diversification of
business, allow the Company to control exposure to potential losses aris-
ing from large risks, and provide additional capacity for growth. Rein-
surance ceded contracts do not relieve the Company from its obligations
to policyholders. The Company remains liable to its policyholders for
the portion reinsured to the extent that any reinsurer does not meet the
obligations assumed under the reinsurance agreements. To minimize its ex-
posure to significant losses from reinsurer insolvencies, the Company
evaluates the financial condition of its reinsurers. Amounts recoverable
from reinsurers are estimated in a manner consistent with the claim lia-
bility associated with the reinsured policies.
(b)Assumed- Discontinued
CIC was involved in providing reinsurance coverage by assuming a portion
of risks underwritten by other insurance companies and pools. Although
CIC withdrew from this reinsurnace business in 1976, its liability re-
mains for losses on policies written during the period in which it par-
ticipated as a reinsurer. The Company is involved with treaties that
cover certain risks which have had significant development industry-wide
over the past several years. The reinsurance assumed loss reserves are
based on current information available from the ceding companies and are
continually reviewed for accuracy and reasonableness. Management is con-
fident that the reserves of $8,917,014 at December 31, 1998 are adequate,
but recognizes the uncertainty industry-wide concerning these exposures.
The Company has provided letters of credit relating to reinsurance as-
sumed of $130,000 and $503,585 at December 31, 1998 and 1997, respec-
tively.
(c)Assumed - Active
In 1997 the Company entered into a reinsurance program whereby CIC as-
sumed and then fully ceded certain accident and health exposures. The
Company receives a brokerage fee on this business and management be-
lieves the Company is not likely to incur any losses on this business.
Net written and earned premiums and losses and loss adjustment expenses
include reinsurance activity as follows:
<TABLE>
<CAPTION>
Written Premiums
1998 1997 1996
<S> <C> <C> <C>
Direct $86,329,672 $94,690,638 $90,939,387
Assumed 1,599,480 4,817,208 -
Ceded (5,153,179) (7,943,050) (1,696,062)
Net premiums written $82,775,973 $91,564,796 $89,243,325
Earned Premiums
1998 1997 1996
Direct $92,203,082 $90,537,623 $79,236,282
Assumed 1,596,487 4,817,208 -
Ceded (5,170,093) (7,903,211) (1,888,963)
Net premiums earned $88,629,476 $87,451,620 $77,347,319
Losses and Loss Adjustment Expenses
1998 1997 1996
Direct $53,447,519 $57,314,915 $40,476,441
Assumed - losses 280,900 5,162,726 1,606,731
Assumed - legal and audit 98,832 55,458 100,016
Ceded (1,450,137) (1,404,697 (1,017,412)
Net losses and loss adjustment expenses $52,377,114 $61,128,402 $41,165,776
</TABLE>
(5) Income Taxes
(a)The Company and its subsidiaries file a consolidated federal income tax
return and separate state franchise and premium tax returns as applicable.
(b)The components of income tax expense for the years 1998, 1997 and 1996
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current expense:
Federal $ 8,096,181 $ 6,055,422 $ 6,683,429
State 785,787 554,922 559,972
Total current expense 8,881,968 6,610,344 7,243,401
Deferred expense(benefit):
Deferred insurance acquisition costs (231,757) 410,933 1,274,812
Unearned premiums 409,745 (279,696) (808,929)
Discount on loss and loss adjustment
expense reserves (322,034) (582,307) (315,137)
Unpaid commissions (140,748) 400,699 (211,404)
Other (20,099) (27,922) (24,592)
Total deferred benefit (304,893) (78,293) (85,250)
Income tax expense $ 8,577,075 $ 6,532,051 $ 7,158,151
(c)A reconciliation of the effective income tax rate, as reflected in the consolidated statements of income, to the
statutory federal income tax rate, is as follows:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
Municipal bond income, net of proration (4.9%) (6.5%) (5.7%)
Dividend received exemption, net of proration (1.7%) (2.0%) (1.9%)
State income tax expense, net of federal tax benefit 1.7% 1.7% 1.5%
Other, net 0.5% 1.9% (0.8%)
Effective income tax rate 30.6% 30.1% 28.1%
(d)Significant components of the deferred tax liabilities and assets are as follows:
<CAPTION>
December 31, December 31,
1998 1997
<S> <C> <C>
Deferred tax liabilities:
Deferred insurance acquisition costs $ 4,733,672 $ 4,823,560
Net unrealized gains on investment securities 9,737,421 16,833,386
Other, net 81,512 94,218
Total deferred tax liabilities 14,552,605 21,751,164
Deferred tax assets:
Unearned premium reserve discounting 2,857,005 3,173,414
Loss and loss adjustment expense reserve discounting 2,571,677 2,201,277
Unpaid commissions 506,308 355,115
Other 395,786 364,078
Total deferred tax assets 6,330,776 6,093,884
Net deferred tax liability $ (8,221,829) $(15,657,280)
</TABLE>
(6) Common Stock Options
The company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" (APB 25) and related Interpreta-
tions in accounting for its stock options. Under APB 25, since the exer-
cise price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recog-
nized.
Had the company elected the fair value approach required under FASB 123
"Accounting for Stock-Based Compensation," net income and earnings per share
would not be materially different for the years 1998, 1997 and 1996. Pro
forma disclosure is required and has been determined as if the Company had
accounted for its stock options under this method. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pri-
cing model with the following weighted-average assumptions for 1998, 1997
and 1996, respectively: risk-free interest rates of 4.4%, 6.3% and 6.5%;
dividend yields of 1.4%, 1.2% and 2.3%; volatility factors of the expected
market price for the Company's common stock of .345, .256 and .229; and a
weighted-average expected life of the options of three years. The weighted-
average fair value of options granted for the years 1998, 1997 and 1996 was
$3.92, $5.20 and $8.44, respectively. The estimated fair value is amortized
to expense over the options' vesting period. The Company's pro forma infor-
mation follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Pro forma net income $19,156,540 $14,871,823 $18,149,961
Pro forma earnings per share:
Basic $1.71 $1.33 $1.64
Diluted $1.70 $1.32 $1.60
The Company's 1993 Stock Option Plan has authorized the grant of options
for up to 1,072,500 shares of the Company's common stock. All options
granted have a five year term and become fully vested at the end of four
years. Stock options available to be granted in the future equal 706,330
shares at December 31, 1998.
A summary of the Company's stock activity, and related information for the
years ended December 31 follows:
</TABLE>
<TABLE>
<CAPTION> 1998 1997 1996
Weighted Avg Weighted Avg Weighted Avg
Options Exercise Price Options Excercise-Price Options Excercise-Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 237,111 $ 11.80 327,123 $ 10.30 238,910 $ 7.30
Granted 97,900 15.75 5,700 22.44 122,319 14.40
Exercised (26,856) 6.30 (83,678) 7.48 (24,106) 5.40
Forfeited (27,231) 15.15 (12,034) 10.06 (10,000) 9.50
Outstanding, end of year 280,924 $ 13.38 237,111 $ 11.80 327,123 $ 10.30
Options currently exercisable at December 31, 1998 were 116,725. The weighted average remaining exercise
period for all outstanding options as of December 31, 1998 was 2.9 years. Exercise prices for options
outstanding as of December 31, 1998 ranged from $2.42 to $26.00 with 93% of these options having
exercise prices between $9.20 and $15.50.
</TABLE>
(7) Statutory Reporting
(a)The financial statements of the insurance subsidiaries have been prepared
in accordance with generally accepted accounting principles, which differ
in certain respects from accounting practices prescribed or permitted by
insurance regulatory authorities (statutory basis). The statutory capital
and surplus and net income of the insurance subsidiaries as reported to
state regulatory authorities, were as follows:
<TABLE>
<CAPTION>
Policyholders' Surplus As Of December 31,
1998 1997 1996
<S> <C> <C> <C>
Capitol Indemnity Corporation $102,902,836 $109,324,111 $86,880,871
Capitol Specialty Insurance Corporation 5,865,245 6,437,879 6,561,248
Total $108,768,081 $115,761,990 $93,442,119
<CAPTION>
Net Income for the Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Capitol Indemnity Corporation $19,051,239 $13,162,055 $13,566,036
Capitol Specialty Insurance Corporation 479,019 297,036 285,640
Total $19,530,258 $13,459,091 $13,851,676
</TABLE>
(b)CIC is required by the Insurance Commissioner of the State of Wisconsin
to maintain a minimum compulsory surplus (surplus as regards policyhold-
ers) of 25% of net premiums written during the preceeding twelve months.
As of December 31, 1998, the amount of compulsory surplus required to be
maintained by CIC was $20,662,367.
(c)State insurance regulations limit the transfer of assets, including divi-
dends, from insurance subsidiaries to the Company without regulatory
approval.
(8) Contingent Liabilities
CIC is a defendant in certain lawsuits involving complaints which demand
damages and recoveries for claims and losses allegedly related to risks in-
sured by CIC. In the opinion of management, such lawsuits are routine in
that they result from the ordinary course of business in the insurance in-
dustry. The reserves for losses and loss adjustment expenses include manage-
ment's estimates of the probable ultimate cost of settling all losses in-
volving lawsuits. See Notes (1)(d), (3) and (4).
(9) Employee Benefit Plans
The Company has a defined contribution benefit plan (the Plan) in which all
qualified employees are eligible to participate. The Plan incorporates a
contributory feature under Section 401(k) of the Internal Revenue Code
allowing employees to defer portions of their income through contributions
to the Plan. The Company's annual contribution to the Plan is 150% of the
first $1,500 of each participant's contribution during the plan year. The
Company made contributions of $214,839, $192,738 and $165,397 in 1998,
1997 and 1996, respectively.
The Company also has an Employee Stock Ownership Plan in which all quali-
fied employees are eligible to participate. The plan provides for discre-
tionary employer contributions of shares of Company stock or cash to pur-
chase shares of Company stock. The Company made contributions of $100,000,
$100,103 and $120,500 in 1998, 1997 and 1996, respectively.
(10)Underwriting, Acquisition and Insurance Expenses
A summary of underwriting, acquisition and insurance expenses incurred
during the years ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net commissions $18,459,299 $19,066,258 $20,629,905
Salaries and other compensation 4,710,297 4,163,019 3,714,706
Other expenses 5,389,054 5,228,744 4,792,078
Total costs 28,558,650 28,458,021 29,136,689
Decrease (Increase) in deferred insurance
acquisition costs 662,164 (1,208,627) (3,749,446)
Total underwriting, acquisition and insurance expenses $29,220,814 $27,249,394 $25,387,243
Substantially all insurance contracts written by CIC are for a term of one year or less and deferred insurance acquisition
costs are amortized over the same term. The amount of deferred insurance costs amortized was $27,833,262, $26,141,226
and $22,801,709 in 1998, 1997 and 1996, respectively.
</TABLE>
(11)Line of Credit
The Company has a line of credit of $10,000,000. There were no significant
borrowings under the line of credit in 1998, and none were outstanding as
of December 31, 1998.
(12)Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
First Second Third Fourth Total
<S> <C> <C> <C> <C> <C>
Revenues $25,467,589 $31,516,526 $25,107,417 $28,969,024 $111,060,556
Losses incurred and expenses 20,787,325 21,504,889 21,144,534 19,622,820 83,059,568
Net income 3,460,541 7,032,357 2,806,682 6,124,333 19,423,913
Net income per share- basic $ 0.31 $ 0.62 $ 0.25 $ 0.55 $ 1.73
Net income per share- diluted $ 0.31 $ 0.62 $ 0.25 $ 0.54 $ 1.72
Dividends per share $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.28
For the Year Ended December 31, 1997
First Second Third Fourth Total
Revenues $22,860,193 $23,561,331 $28,429,980 $36,588,014 $111,439,518
Losses incurred and expenses 20,385,851 22,966,573 22,715,370 23,647,794 89,715,588
Net income 2,040,337 623,705 3,997,078 8,530,759 15,191,879
Net income per share- basic $ 0.18 $ 0.06 $ 0.36 $ 0.76 $ 1.36
Net income per share- duiluted $ 0.18 $ 0.06 $ 0.35 $ 0.76 $ 1.35
Dividends per share $ 0.17 $ 0.07 $ 0.07 $ 0.07 $ 0.38
</TABLE>
(13) Industry Segment Disclosures
Effective January 1, 1998 the Company adopted the Financial Accounting
Standards Board's Statement of Financial Standard No. 131, "Disclosures a-
bout Segments of an Enterprise and Related Information". SFAS No. 131 su-
percedes SFAS No. 14, "Financial Reporting for Segments of a Business En-
terprise". SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in pub-
lished financial reports. It also establishes standards for related dis-
closures about products and services, geographic areas, and major custo-
mers. The adoption of SFAS No. 131 did not affect results of operations or
financial position, but did affect the disclosures of segment information.
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) discontinued reinsurance assumed
operations.These segments constitute 100% of the operations of the Company.
The property and casualty segment provides specialty commercial coverages
for beauty and barber shops, bowling alleys, contractors/manufacturers, day
care centers, restaurants, detective/guard agencies, golf courses and ta-
verns. This segment also provides nurses professional, deerhunters and
sportsman's accident and special event coverages. The fidelity and surety
segment offers a full range of surety and fidelity bonds, including con-
tractor's payment and performance bonds, license/permit bonds, fiduciary
and judicial bonds, as well as commercial fidelity bonds. The reinsurance
assumed segment was discontinued in 1976, but due to the nature of the
coverages the Company continues to experience loss activity related to
this business. The Company maintains and monitors its segment information
on a statutory basis. Financial data by segment, including a reconciliation
to Consolidated GAAP basis, for 1996 through 1998 is as follows:
<TABLE>
<CAPTION> 1998 1997 1996
<S> <C> <C> <C>
Revenue, excluding net investment income
and realized investment gains:
Property and Casualty $ 65,678,284 $ 61,953,576 $ 56,560,140
Fidelity and Surety 22,948,025 25,498,044 20,786,234
Reinsurance Assumed 3,167 - 945
Totals: $ 88,629,476 $ 87,451,620 $ 77,347,319
Losses and loss adjustment expenses:
Property and Casualty $ 40,400,269 $ 42,598,229 $ 33,924,353
Fidelity and Surety 11,818,682 13,531,066 5,710,164
Reinsurance Assumed 379,732 5,218,184 1,706,747
Totals: $ 52,598,683 $ 61,347,479 $ 41,341,264
Reconciliation to Consolidated GAAP:
Inter-company adjustments (221,569) (219,077) (175,488)
Consolidated GAAP: $ 52,377,114 $ 61,128,402 $ 41,165,776
Other underwriting expenses:
Property and Casualty $ 20,226,965 $ 18,872,812 $ 19,825,337
Fidelity and Surety 9,239,049 10,524,643 10,046,062
Reinsurance Assumed 34,509 (2,825) 23,954
Totals: $ 29,500,523 $ 29,394,630 $ 29,895,353
Reconciliation to Consolidated GAAP:
Decrease (increase) in D.I.A.C. 662,164 (1,208,627) (3,749,446)
Inter-company adjustments 519,767 401,183 534,750
Consolidated GAAP: $ 30,682,454 $ 28,587,186 $ 26,680,657
Net investment gain and other income:
Property and Casualty $ 6,742,389 $ 7,106,636 $ 4,490,999
Fidelity and Surety 692,572 727,037 295,676
Reinsurance Assumed 821,247 824,387 749,637
Totals: $ 8,256,208 $ 8,658,060 $ 5,536,312
Reconciliation to Consolidated GAAP:
Capital and Surplus 13,419,217 14,465,107 9,226,166
Inter-company adjustments 755,655 864,731 1,243,945
Consolidated GAAP: $ 22,431,080 $ 23,987,898 $ 16,006,423
Income tax expense (benefit):
Property and Casualty $ 3,652,050 $ 2,552,145 $ 2,499,947
Fidelity and Surety 803,964 630,081 1,818,781
Reinsurance Assumed 128,293 (1,432,002) (337,071)
Totals: $ 4,584,307 $ 1,750,224 $ 3,981,657
Reconciliation to Consolidated GAAP:
Capital and Surplus 4,091,130 4,623,364 3,039,847
GAAP & inter-company adjustments (98,362) 158,463 136,647
Consolidated GAAP: $ 8,577,075 $ 6,532,051 $ 7,158,151
Net income (loss):
Property and Casualty $ 8,141,389 $ 5,037,026 $ 4,801,502
Fidelity and Surety 1,778,902 1,539,291 3,506,903
Reinsurance Assumed 281,880 (2,958,970) (643,048)
Totals: $ 10,202,171 $ 3,617,347 $ 7,665,357
Reconciliation to Consolidated GAAP: 9,221,742 11,574,532 10,683,801
Consolidated GAAP: $ 19,423,913 $ 15,191,879 $ 18,349,158
Assets:
Property and Casualty $105,614,860 $114,384,689 $ 87,184,725
Fidelity and Surety 20,432,187 22,128,793 16,866,704
Reinsurance Assumed 9,996,577 10,826,652 8,252,142
Totals: $136,043,624 $147,340,134 $112,303,571
Reconciliation to Consolidated GAAP:
Capital and Surplus 141,315,973 139,342,141 116,581,883
Consolidated GAAP: $277,359,597 $286,682,275 $228,885,454
The Company operates in 37 states, with all business conducted within the United States. No customer
represents greater than 10% of the Company's revenue. There have been no material intersegment transactions.
</TABLE>
SCHEDULE I
CAPITOL TRANSAMERICA CORPORATION
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 1998
(Consolidated)
<TABLE>
<CAPTION>
Amount at
Which Shown
Fair in Balanc
Type of Investment Cost Value Sheet
<S> <C> <C> <C>
Fixed maturity securities, available-for-sale:
Bonds:
United Stated Government and government
agencies and authorities $ 51,204 $ 55,350 $ 55,350
State, municipalities, and political subdivisions 67,339,664 74,182,001 74,182,001
All other corporate bonds 819,678 824,109 824,109
Total 68,210,546 75,061,460 75,061,460
Equity securities, available-for-sale:
Common stocks:
Public utilities 2,065,853 1,858,777 1,858,777
Banks, trusts, and insurance companies 67,411,592 85,409,961 85,409,961
Industrial, miscellaneous, and all other 46,105,643 48,104,298 48,104,298
Nonredeemable preferred stocks 6,769,703 7,851,215 7,851,215
Total 122,352,791 143,224,251 143,224,251
Real estate, net of depreciation 9,999,919 - 9,999,919
Short-term investments 9,854,962 - 9,854,962
Total Investments $210,418,218 218,285,711 $238,140,592
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CAPITOL TRANSAMERICA CORPORATION
(Parent Company)
<CAPTION>
CONDENSED BALANCE SHEETS December 31,
Assets 1998 1997
<S> <C> <C>
Investments $10,749,331 $ 9,925,434
Cash 3,171 10,461
Accrued investment income 60,454 45,340
Investment in subsidiaries 129,393,891 128,967,449
Other assets 1,651,444 1,416,571
Total assets $141,858,291 $140,365,255
Liabilities and shareholders' equity
Liabilities:
Accounts payable $ 33,933 $ 40,717
Income taxes payable 18,338 5,461
Deferred income taxes 490,047 976,936
Total liabilities 542,318 1,023,114
Shareholders' equity:
Common stock 11,529,376 11,502,520
Additional paid-in-capital 21,799,397 21,656,988
Unrealized appreciation (depreciation) on available-for-
sale securities, net of deferred taxes 910,087 1,896,403
Retained earnings (including undistributed earnings of
subsidiaries of $102,271,184 and $81,151,740, respectively)107,572,672 104,687,505
141,811,532 139,743,416
Less treasury stock, at cost (495,559) (401,275)
Total shareholders' investment 141,315,973 139,342,141
Total liabilities and shareholders' investment $141,858,291 $140,365,255
December 31,
STATEMENTS OF INCOME 1998 1997 1996
<S> <C> <C> <C>
Dividends received from subsidiaries $ 5,000,000 $ 4,500,000 $ 4,200,000
Management fees received from subsidiaries 2,031,293 1,768,789 1,515,478
Investment income 350,901 270,678 272,035
Realized investment gains 13 236,914 448,156
Other income 7,100 14,577 646
Total Income 7,389,307 6,790,958 6,436,315
Administrative expenses 1,495,240 1,371,392 1,363,770
Net income before tax and equity in undistributed
net income of subsidiaries 5,894,067 5,419,566 5,072,545
Income tax expense 346,794 238,511 220,197
Net income before equity in undistributed
net income of subsidiaries 5,547,273 5,181,055 4,852,348
Equity in undistributed net income of
subsidiaries, net of dividends paid 13,876,640 10,010,824 13,496,810
Net Income $19,423,913 $15,191,879 $18,349,158
The accompanying condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto of Capitol Transamerica Corporation.
SCHEDULE II
(continued)
<CAPTION>
CAPITOL TRANSAMERICA CORPORATION
(Parent Company)
December 31,
STATEMENTS OF CASH FLOWS 1998 1997 1996
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net income $19,423,913 $15,191,879 $18,349,158
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 850,739 778,343 728,940
Realized investment gains (13) (236,914) (448,156)
Change in:
Equity in net income of subsidiaries (13,876,640) (10,010,824) (13,496,810)
Other assets (21,410) 671,601 (488,710)
Other liabilities 6,093 (412,478) (189,618)
Net cash provided by operating activitities 6,382,682 5,981,607 4,454,804
Cash flows provided by (used for) investing activities:
Proceeds from investments sold/matured 70,022 471,238 1,091,372
Purchases of investments (2,367,149) (2,276,930) -
Purchase of depreciable assets (1,079,278) (477,992) (1,279,331)
Net cash used for investing activitities (3,376,405) (2,283,684) (187,959)
Cash flows provided by (used for) financing activities:
Cash dividends paid (3,163,880) (4,281,405) (3,731,375)
Capital contribution to subsidiaries - - (700,000)
Stock options exercised 169,265 626,022 189,650
Net proceeds from sale (purchase) of treasury stock (18,952) (63,769) (15,799)
Net cash used for financing activitities (3,013,567) (3,719,152) (4,257,524)
Net decrease) increase in cash (7,290) (21,229) 9,231
Cash, beginning of year 10,461 31,690 22,369
Cash, end of year $ 3,171 $ 10,461 $ 31,690
Cash paid during the year for:
Income taxes $ 333,917 $ 175,400 $ 48,761
Interest 4,190 - 51,417
The accompanying condensed financial information should be read in conjunction with the
consolidated financial statements and notes thereto of Capitol Transamerica Corporation.
SCHEDULE III
CAPITOL TRANSAMERICA CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION
<CAPTION>
December 31,
Deferred Future Policy
Policy Benefits, Losses, Other
Acquisition Claims, and Unearned Policyholde
Segment Costs Loss Expense Premiums Funds
<S> <C> <C> <C> <C>
1998
Property-casualty
insurance $13,524,777 $78,504,050 $41,541,432 $ -
1997
Property-casualty
insurance $14,186,941 $71,472,338 $47,411,849 $ -
1996:
Property-casualty
insurance $12,978,314 $47,702,363 $43,258,833 $ -
<CAPTION>
Year ended December 31
Benefits, Amortization of
Net Claims, Losses, Deferred Policy Other
Premium Investment and Settlement Acquisition Operating Premiums
Sement Revenue Income Expenses Costs Expenses Written
<S> <C> <C> <C> <C> <C> <C>
1998
Property-casualty insurance $88,629,476 $ 9,119,936 $52,377,114 $27,833,262 $ 1,461,640 $87,929,152
1997
Property-casualty insurance $87,451,620 $ 8,580,713 $61,128,402 $26,141,226 $ 1,337,792 $99,507,846
1996:
Property-casualty insurance $77,347,319 $ 7,155,382 $41,165,776 $22,801,709 $ 1,293,414 $90,939,387
SCHEDULE IV
CAPITOL TRANSAMERICA CORPORATION
REINSURANCE
For The Years Ended December 31, l998, l997 and l996
<CAPTION>
Assumed Percentage
Gross Ceded to From Assumed of Amount
Premiums Other Other From Net Assumed
Written Companies Companies Affiliates Amount To Net
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
Premiums Written:
Accident and Health insurance $ 288,332 $ 1,596,313 $ 270,803 $ 1,325,510 $ 288,332 553.6%
Property & casualty and
fidelity & surety insurance $86,041,340 $ 3,556,866 $ 3,167 $ - $82,487,641 0.0%
Total premiums written $86,329,672 $ 5,153,179 $ 273,970 $ 1,325,510 $82,775,973 1.9%
December 31, 1997
Premiums Written:
Accident and Health insurance $ 273,106 $ 4,817,208 $ 2,406,951 $ 2,410,257 $ 273,106 1,763.9%
Property & casualty and
fidelity & surety insurance 94,417,533 3,125,843 - - 91,291,690 -
Total premiums written $94,690,639 $ 7,943,051 $ 2,406,951 $ 2,410,257 $91,564,796 5.3%
December 31, 1996
Premiums Written:
Accident and Health insurance $ 238,615 $ - $ - $ - $ 238,615 -
Property & casualty and
fidelity & surety insurance 90,700,772 $ 1,696,062 $ - $ - $89,004,710 -
Total premiums written $90,939,387 $ 1,696,062 $ - $ - $89,243,325 -
SCHEDULE VI
CAPITOL TRANSAMERICA CORPORATION
SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
December 31, l998
<CAPTION>
As of December 31,
BALANCE SHEET DATA: 1998 1997
<S> <C> <C>
Deferred insurance acquisition costs $13,524,777 $14,186,941
Outstanding loss and loss adjustment expense reserves 78,504,050 71,472,338
Discount deducted from reserves - -
Unearned premiums $41,541,432 $47,411,849
<CAPTION>
INCOME STATEMENT DATA: Year Ended
1998 1997 1996
<S> <C> <C> <C>
Earned premiums $88,629,476 $87,451,620 $77,347,319
Net investment income 9,119,936 8,580,713 7,155,382
Incurred losses and loss adjustment
expenses related to:
Current year 49,862,090 43,042,827 36,041,564
Prior years 2,515,024 18,085,575 5,124,212
Amortization of deferred policy
acquisition costs 27,833,262 26,141,226 22,801,709
Paid claims and claim adjustment
expenses 46,405,683 37,488,267 31,732,853
Gross premiums written $87,929,152 $99,507,846 $90,939,387
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 75061460
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 135373036
<MORTGAGE> 0
<REAL-ESTATE> 9999919
<TOTAL-INVEST> 238140592
<CASH> 1544438
<RECOVER-REINSURE> 913186
<DEFERRED-ACQUISITION> 13524777
<TOTAL-ASSETS> 277359597
<POLICY-LOSSES> 55336376
<UNEARNED-PREMIUMS> 41541432
<POLICY-OTHER> 23167674
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 11529376
<OTHER-SE> 129786597
<TOTAL-LIABILITY-AND-EQUITY> 277359597
88629476
<INVESTMENT-INCOME> 9119936
<INVESTMENT-GAINS> 13198139
<OTHER-INCOME> 113005
<BENEFITS> 52377114
<UNDERWRITING-AMORTIZATION> 29220814
<UNDERWRITING-OTHER> 1461640
<INCOME-PRETAX> 28000988
<INCOME-TAX> 8577075
<INCOME-CONTINUING> 19423913
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19423913
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.72
<RESERVE-OPEN> 71472338
<PROVISION-CURRENT> 49862090
<PROVISION-PRIOR> 3575305
<PAYMENTS-CURRENT> 20035517
<PAYMENTS-PRIOR> 26370166
<RESERVE-CLOSE> 78504050
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
