SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 1999 Commission file number: 0-2047
CAPITOL TRANSAMERICA CORPORATION (CTC)
(Exact name of registrant as specified in its charter)
A WISCONSIN CORPORATION 39-1052658
4610 University Avenue
Madison, Wisconsin 53705-0900
Registrant's telephone number, including area code: (608) 231-4450
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the regis-
trant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Based on the closing average of the high (13 1/4) and low price (12 7/8), the
aggregate market value of voting stock held by non-affiliates of the registrant
as of June 30, 1999 was approximately $147,216,674.
Indicate the number of shares of each of the issuer's class of common stock, as
of the latest practicable date:
At June 30, 1999
Common Stock, $1.00 Par Value;
Issued: 11,538,322
Outstanding: 11,270,176
Total Pages: 21
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Part I
Financial Information Page
Consolidated Financial Statements 3 - 7
Notes to Consolidated Financial Statements 8 - 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10 - 12
Condensed Statutory Financial
Statements of Insurance Subsidiaries 13
Part II
Other Information and Exhibits
Other Disclosures 15
Officers and Directors 16
Signatures 17
Exhibit 1 (Press Release) 18 - 21
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31, June 30,
1999 1998 1998
<S> <C> <C> <C>
ASSETS
Investments:
Available-for-sale investment securities, at fair value
U.S. Government bonds (amortized cost $42,020, $51,204
and $54,012, respectively) $ 45,297 $ 55,350 $ 58,695
State, municipal and political subdivision bonds (amortized
cost $73,514,131, $67,339,664 and $66,334,009, respectively) 78,690,577 74,182,001 70,602,600
Corporate bonds and notes (amortized cost $878,383,
$819,678 and $818,174, respectively) 849,020 824,109 867,489
Equity securities:
Common stock (cost $121,537,302, $115,583,088 and
$110,607,273, respectively) 137,043,056 135,373,036 148,727,611
Nonredeemable preferred stock (cost $6,183,941, $6,769,703
and $6,269,703, respectively) 7,520,735 7,851,215 8,367,001
Investment real estate, at cost, net of depreciation 10,282,768 9,999,919 8,695,480
Short-term investments, at cost which
approximates fair value 3,950,315 9,854,962 5,948,642
Total Investments 238,381,768 238,140,592 243,267,518
Cash 1,128,175 1,544,438 590,537
Accrued investment income 1,663,726 1,678,998 1,721,169
Receivables from agents, insureds and others, less allowance for
doubtful accounts of $530,000, $500,000 and $470,000, respectively 19,424,051 17,217,646 21,621,406
Balances due from reinsurers 2,479,652 913,186 259,811
Funds held by ceding reinsurers 35,756 35,756 43,235
Deferred insurance acquisition costs 14,115,040 13,524,777 13,797,429
Prepaid reinsurance premiums 1,047,296 727,074 373,979
Due from securities brokers 4,218,511 1,633,833 5,211,626
Income taxes receivable - 141,982 -
Other assets 2,234,599 1,801,315 2,054,910
Total Assets $284,728,574 $277,359,597 $288,941,620
</TABLE>
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31, June 30,
1999 1998 1998
<S> <C> <C> <C>
LIABILITIES
Policy liabilities and accruals:
Reserve for losses $ 54,619,303 $ 55,336,376 $ 51,238,825
Reserve for loss adjustment expenses 23,120,951 23,167,674 23,125,685
Unearned premiums 42,363,069 41,541,432 46,264,452
Total Policy Liabilities and Accruals 120,103,323 120,045,482 120,628,962
Accounts payable 3,212,105 3,340,980 2,265,554
Claim drafts outstanding 3,002,366 2,836,566 3,516,495
Due to securities brokers 1,009,992 231,185 936,828
Balances due to reinsurers 1,513,791 1,038,967 669,888
Accrued premium taxes 225,008 237,171 176,335
Income taxes payable 1,621,060 91,444 1,497,986
Deferred income taxes 6,414,103 8,221,829 13,942,208
Total Other Liabilities 16,998,425 15,998,142 23,005,294
Total Liabilities 137,101,748 136,043,624 143,634,256
SHAREHOLDERS' INVESTMENT
Common stock, $1.00 par value, authorized 15,000,000 shares,
issued 11,538,322, 11,529,376 and 11,522,605, respectively 11,538,322 11,529,376 11,522,605
Paid-in surplus 22,589,189 22,246,366 22,136,114
Accumulated other comprehensive income, net of deferred taxes of
$7,697,519, $9,702,829 and $15,143,679, respectively 14,295,389 18,019,545 29,396,546
Retained earnings 99,699,485 90,016,245 82,722,142
Shareholders' investment before treasury stock 148,122,385 141,811,532 145,777,407
Treasury stock, 268,146, 307,196 and 305,592 shares,
respectively, at cost (495,559) (495,559) (470,043)
Total Shareholders' Investment 147,626,826 141,315,973 145,307,364
Total Liabilities and Shareholders' Investment $284,728,574 $277,359,597 $288,941,620
Book Value Per Share $ 13.10 $ 12.59 $ 12.95
Shares Outstanding 11,270,176 11,222,180 11,217,013
</TABLE>
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
For the Six Months For the Three Months
Ended June 30 Ended June 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES
Premiums earned $ 41,516,233 $ 44,814,531 $ 21,004,633 $ 22,566,270
Net investment income 4,438,879 4,582,773 2,293,549 2,286,942
Realized investment gains 5,260,243 7,537,903 2,905,997 6,641,351
Other revenues 129,070 48,908 50,444 21,963
Total Revenues 51,344,425 56,984,115 26,254,623 31,516,526
LOSSES INCURRED AND EXPENSES
Losses incurred 15,690,363 22,985,036 5,923,423 11,551,728
Loss adjustment expenses incurred 4,097,851 3,959,518 2,174,552 2,329,743
Underwriting, acquisition and
insurance expenses 15,062,077 14,270,964 8,199,296 7,459,669
(Decrease) increase in deferred
insurance acquisition costs (590,263) 389,512 (261,586) (180,267)
Other expenses 670,716 687,184 344,318 344,016
Total Losses Incurred
and Expenses 34,930,744 42,292,214 16,380,003 21,504,889
Income from operations before
income taxes 16,413,681 14,691,901 9,874,620 10,011,637
Income tax expense (benefit)
Current 4,958,648 4,330,445 3,134,038 2,913,422
Deferred 197,586 (131,442) 8,187 65,858
5,156,234 4,199,003 3,142,225 2,979,280
Net Income $ 11,257,447 $ 10,492,898 $ 6,732,395 $ 7,032,357
INCOME PER SHARE - BASIC $ 1.00 $ 0.94 $ 0.60 $ 0.63
Weighted Average Number of Shares
Outstanding - Basic 11,230,192 11,179,758 11,230,192 11,179,758
INCOME PER SHARE - DILUTED $ 1.00 $ 0.93 $ 0.60 $ 0.63
Weighted Average Number of Shares
Outstanding - Diluted 11,253,441 11,243,474 11,253,441 11,243,474
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS INVESTMENT
AND COMPREHENSIVE INCOME
<CAPTION>
Accumu-
Common lated
Common Stock Other
Stock Distributable Compre- Compre-
(Par Value (Par Value Paid-In hensive hensive Retained Treasury
$1.00) $1.00) Surplus Income Income Earnings Stock
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 7,612,711 $ 3,806,355 $21,114,644 $ - $21,624,025 $62,761,654 $ (337,506)
Comprehensive income
Net income - - - 15,191,879 - 15,191,879 -
Other comprehensive income
Unrealized appreciation on
available-for sale securities,
net of deferred taxes - - - 21,197,000 - - -
Less: reclassification adjust-
ment, net of tax of $5,225,931,
for gain included in net income - - - (10,144,453) - - -
Other comprehensive income - - - 11,052,547 11,052,547 - -
Comprehensive income - - - 26,244,426 - - -
Stock options exercised 83,678 - 542,344 - - - (63,769)
Purchases and sales of treasury
stock, net - - 175,218 - - - -
Stock dividend 3,806,131 (3,806,355) - - - - -
Cash dividends declared - - - - - (4,221,415) -
Balance, December 31, 1997 $11,502,520 - $21,832,206 - $32,676,572 $73,732,118 $ (401,275)
Comprehensive income
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)
Compehensive income
Net income - - - 11,257,447 - 11,257,447 -
Other comprehensive income
Unrealized depreciation on
available-for sale securities,
net of deferred taxes - - - (304,998) - - -
Less: reclassification adjust-
ment, net of tax of $1,841,085,
for gain included in net income - - - (3,419,158) - - -
Other comprehensive income - - - (3,724,156) (3,724,156) - -
Comprehensive income - - - 7,533,291 - - -
Stock options exercised 8,946 - 52,399 - - - -
Purchases and sales of treasury
stock, net - - 290,424 - - - -
Cash dividend declared - - - - - (1,574,207) -
Balance, June 30, 1999 $11,538,322 - $22,589,189 - $14,295,389 $99,699,485 $ (495,559)
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
June 30, December 31, June 30,
1999 1998 1998
Cash flows provided by operating activities:
<S> <C> <C> <C>
Net Income $11,257,447 $ 19,423,913 $ 10,492,898
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 534,004 1,195,955 547,904
Realized investment gains (5,260,243) (13,198,139) (7,537,903)
Change in:
Deferred insurance acquisition costs (590,263) 662,164 389,512
Unearned premiums 821,637 (5,870,417) (1,147,397)
Allowance for doubtful accounts receivable from agents 30,000 60,000 30,000
Accrued investment income 15,272 28,694 (13,477)
Receivables from agents, insureds and others (2,236,405) 3,542,835 (830,925)
Balances due to/from reinsurers 391,207 (191,361) 112,629
Reinsurance recoverable on paid and unpaid losses (1,482,849) (897,506) (917,200)
Funds held by ceding reinsurers - (35,756) (43,235)
Income taxes payable 1,671,598 633,804 2,254,495
Deferred income taxes 197,584 (304,896) (131,445)
Due to/from securities brokers (1,805,871) (6,721,020) (9,593,170)
Prepaid reinsurance premiums (320,222) 16,914 370,009
Other assets (395,392) (5,305) (385,812)
Reserve for losses and loss adjustment expenses (763,796) 7,031,712 2,892,172
Accounts payable 36,925 371,977 (23,518)
Accrued premium taxes (12,163) (99,992) (160,828)
Net cash provided by operating activities 2,088,470 5,643,576 (3,695,291)
Cash flows provided by (used for) investing activities:
Proceeds from sales of available-for-sale investments 20,543,045 40,484,195 25,093,983
Purchases of available-for-sale investments (26,506,213) (49,573,482) (22,412,160)
Maturities of available-for-sale investments 5,078,478 7,660,719 2,201,620
Purchase of depreciable assets (397,605) (1,080,065) (486,682)
Net cash used for investing activities (1,282,295) (2,508,633) (4,396,761)
Cash flows provided by (used for) financing activities:
Cash dividends paid (1,574,207) (3,139,786) (1,568,706)
Stock options exercised 61,345 150,314 80,007
Net proceeds from sale of treasury stock 290,424 196,419 175,218
Net cash used for financing activities (1,222,438) (2,793,053 (1,313,481)
Net (decrease) increase in cash (416,263) 341,890 (612,011)
Cash, beginning of period 1,544,438 1,202,548 1,202,548
Cash, end of period $ 1,128,175 $ 1,544,438 $ 590,537
Cash paid during the year for:
Income taxes $ 4,087,024 $ 8,358,132 $ 2,182,031
</TABLE>
CAPITOL TRANSAMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(1) Basis of Presentation
The condensed financial statements included herein of Capitol
Transamerica Corporation (the "Company"), other than the Consolidated
Balance Sheet as of December 31, 1998, and the Consolidated Statement
of Cash Flows as of December 31, 1998, have been prepared by the Compa-
ny without audit, pursuant to the rules and regulations of the
Securities Exchange Commission. Certain information and footnote dis-
closures normally included in financial statements prepared in accor-
dance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations.
Although the Company believes the disclosures are adequate to make the
information presented not misleading, it is suggested that these con-
densed financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's 1998 annual
report on Form 10-K.
(2) Income Per Share
Net income per share is computed by dividing net income by the weighted
average number of shares of stock outstanding during the period.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 128 (SFAS 128), "Earnings per Share," which re-
places the presentation of primary and fully diluted earnings per share
(EPS) with a presentation of basic and diluted EPS. The following
table sets forth the computation of basic and diluted EPS:
<TABLE>
<CAPTION>
June 30, Dec. 31, June 30,
1999 1998 1998
<S> <C> <C> <C>
Numerator:
Consolidated net income $11,257,447 $19,423,913 $10,492,898
Denominator:
Denominator for basic EPS - weighted average shares 11,230,192 11,206,018 11,179,758
Effect of dilutive securities - employee stock options 23,249 74,424 63,716
Denominator for diluted EPS 11,253,441 11,280,442 11,243,474
</TABLE>
(3) Income Taxes
Deferred income taxes reflect the net tax effects of temporary differ-
ences between the carrying amounts of assets and liabilities for finan-
cial statement purposes and the amounts used for income taxes.
(4) Common Stock Options
There were 8,946 options exercised during the six months ended June
30, 1999 and there were 20,085 options exercised during the six
months ended June 30, 1998. For further information regarding stock
options, refer to Note 6 of Notes to Consolidated Financial Statements
included in the Company's 1998 annual report.
(5) Dividends
1999
On May 13, 1999 a cash dividend of $.07 per share was declared to
shareholders of record June 11, 1999 and paid June 25, 1999 in the
amount of $788,708.
On February 26, 1999 a cash dividend of $.07 per share was declared to
shareholders of record March 12, 1999 and paid March 26, 1999 in the
amount of $785,999.
1998
On October 21, 1998 a cash dividend of $.07 per share was declared to
shareholders of record December 4, 1998 and paid December 18, 1998 in
the amount of $785,669.
On July 24, 1998 a cash dividend of $.07 per share was declared to
shareholders of record September 11, 1998 and paid September 25,1998
in the amount of $785,410.
On April 29, 1998 a cash dividend of $.07 per share was declared to
shareholders of record June 12, 1998 and paid June 26, 1998 in the
amount of $785,191.
On February 27, 1998 a cash dividend of $.07 per share was declared to
shareholders of record March 13, 1998 and paid March 27, 1998 in the
amount of $783,327.
(6) Investments
Fixed maturities and equity securities are classified as available-for-
sale and, accordingly, are carried at fair value, with unrealized gains
and losses reported as a separate component of shareholders' investment
net of taxes. The cost of fixed maturities is adjusted for amortization
of premiums and accretion of discounts to maturity. Fixed maturities
and equity securities deemed to have declines in value that are other
than temporary are written down through the statement of income to
carrying values equal to their estimated fair values.
Investment real estate is carried at cost net of accumulated deprecia-
tion of $962,159, $789,597 and $606,799 as of June 30, 1999, December
31, 1998 and June 30, 1998, respectively.
Cost of investments sold is determined under the specific identifica-
tion method.
(7) Contingent Liabilities
The Company is a defendant in certain lawsuits involving complaints
which demand damages and recoveries for claims and losses alledgedly
related to risks insured by the Company. In the opinion of management,
such lawsuits are routine in that they result from the ordinary course
of business in the insurance industry. The reserve for losses includes
management's estimates of the probable ultimate cost of settling all
losses involving lawsuits.
(8) Industry Segment Disclosures
Effective January 1, 1998 the Company adopted the Financial Accounting
Standards Board's Statement of Financial Standards No. 131, "Dis-
closures about Segments of an Enterprise and Related Information."
The adoption of SFAS No. 131 did not affect results of operations or
financial position, but did affect the disclosures of segment inform-
ation.
The Company has three business segments, which are segregated based
on the types of products and services provided. The segments are
(1) property and casualty, (2) fidelity and surety, and (3) discon-
tinued reinsurance assumed operations. These segments constitute
100% of the operations of the Company. Data for each segment as
required for interim reporting follows:
<TABLE>
<CAPTION>
Year to Date
June 30, December 31, June 30,
1999 1998 1998
<S> <C> <C> <C>
Total Revenues:
Property & Casualty $ 35,134,996 $ 72,420,673 $ 36,724,045
Fidelity & Surety 9,889,077 23,640,597 12,155,855
Reinsurance Assumed 424,566 824,414 449,051
Totals: $ 45,448,639 $ 96,885,684 $ 49,328,951
Before-tax Profit (Loss):
Property & Casualty $ 9,711,547 $ 11,793,098 $ 8,027,555
Fidelity & Surety 244,328 2,582,866 (624,853)
Reinsurance Assumed 174,292 410,173 117,132
Totals: $ 10,130,167 $ 14,786,137 $ 7,519,834
Reconciliation to Consolidated GAAP:
Capital and Surplus 5,591,816 12,817,913 7,008,719
Inter-company Adjustments 691,698 396,938 (2,534,453)
Consolidated net income before-tax:$ 16,413,681 $ 28,000,988 $ 11,994,100
</TABLE>
There has been no material change in the allocation of assets among the
segments, and there has been no change in the method of measurement for
the results of the segment operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Capitol Transamerica Corporation (the "Company") is an insurance holding company
operating in 37 states which writes, through its insurance subsidiaries, both
property-casualty and fidelity-surety insurance. The property-casualty segement
accounts for approximately 75% of the business written while the fidelity-surety
segment accounts for approximately 25% of the Company's business.
The underwriting cylcles of the property-casualty insurance industry have been
characterized by peak periods of adequate rates, underwriting profits and lower
combined ratios, while the downward side of the cycle is characterized by inade-
quate rates, underwriting losses and, as a result, higher combined ratios. The
adequacy of premium rates is affected primarily by the severity and frequency of
claims which, in turn, are affected by natural disasters, regulatory measures
and court decisions which continue to uphold the "deep pocket" theory in award-
ing against insurance companies. Unfortunately for the insurance industry, the
trend of increasing price competition has continued as has the number of signi-
ficant natural disasters. This combination has resulted in considerable reduct-
ion in underwriting profitability for the industry as a whole.
Adequate premium rates continue to be of concern to the Company and the proper-
ty-casualty insurance industry as a whole. Mangement feels strongly that rate
regulators have been slow to adjust rates in response to increased claim costs
from the factors noted above. This, when combined with increased competition in
the Companys' niche market, has presented an unprecedented challenge to manage-
ment. The Company has responded to this challenge with increased marketing ef-
forts as well as the addition of innovative programs and alliances that should
position the Company for continued expansion and profitability.
OPERATING RESULTS
As mentioned in the Overview section, management belives that the property-
casualty insurance industry is in a downward cycle. Indeed, in the first six
months the Company saw a continuation of the decrease in premium writings that
began in 1998. However, the increased claim activity that the Company experi-
enced in 1997 has stabilized, as indicated by the decrease in the loss ratio.
The expense portion of the combined ratio increased largely due to the decrease
in the denominator, which is premiums written. Management believes the increased
marketing efforts noted in the Overview will counter the difficult market con-
ditions and restore the Company's trend of increasing underwriting profits.
For the six months ended June 30, 1999, gross premiums written totaled
$44,658,675, down 3.9% over the $46,464,458 written in the first six months
of 1998. The new programs begun by the Company are just beginning to influence
premium totals, and as they become fully implemented premium results should be-
come much more favorable.
Premiums earned are recognized as net revenues after reduction for reinsurance
ceded and after establishment of the provision for the pro-rata unearned portion
of premiums written. Net premiums earned totaled $41,516,233, $88,629,476 and
$44,814,531 for the respective periods, and net unearned premiums were
$42,363,069, $41,541,432 and $46,264,452 at each respective period.
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1999 1998 1998
<S> <C> <C> <C>
Gross Premiums Written $44,658,675 $87,929,152 $46,464,458
Reinsurance Ceded 2,641,027 5,153,179 2,742,067
Net Premiums Written $42,017,648 $82,775,973 $43,722,391
Net Premiums Earned $41,516,233 $88,629,476 $44,814,531
Net Unearned Premium Reserve $42,363,069 $41,541,432 $46,264,452
The Company's underwriting results can be measured by reference to the combined
loss and expense ratios. This tabulation includes the operating results of the
two subsidiary insurance companies on a statutory basis. Losses and loss adjust-
ment expenses are stated as a ratio of net premiums earned, while underwriting
expenses are stated as a ratio of net premiums written. The combined ratios
were as follows:
<CAPTION>
June 30, December 31, June 30,
Insurance Operating Ratios (Statutory Basis): 1999 1998 1998
<S> <C> <C> <C>
Loss and Loss Adjustment Expenses 47.9% 59.4% 60.4%
Underwriting Expenses 36.7% 35.6% 33.7%
Combined Ratios 84.6% 95.0% 94.1%
The Company's combined ratio continues to compare very favorably with the industry average, which was
107.4% for the year 1998.
</TABLE>
REINSURANCE
The Company follows the customary practice of reinsuring with other companies,
e.g., ceding a portion of its exposure on the policies it has written. This pro-
gram of reinsurance permits the Company greater diversification of business and
the ability to write larger policies while limiting the extent of its maximum
net loss. It provides protection for the Company against unusually serious oc-
currences in which a number of claims could produce a large aggregate loss.
Management continually monitors the Company's reinsurance program to obtain pro-
tection that should be adequate to ensure the availability of funds for losses
while maintaining future growth.
NET INVESTMENT INCOME AND REALIZED GAINS
The Company's fixed maturities and equity securites are classified as available-
for-sale and are carried at fair value. The unrealized gains and losses, net of
tax, are reported as a separate component of shareholders' investment.
Interest and Dividend Income: Interest on fixed maturities is recorded as income
when earned and is adjusted for any amortization of purchase premium or accre-
tion of discount. Dividends on equity securities are recorded as income on ex-
dividend dates.
<TABLE>
<CAPTION>
June 30, December 31, June 30,
Investments: 1999 1998 1998
<S> <C> <C> <C>
Invested Assets $ 238,381,768 $ 238,140,592 $ 243,267,518
Net Investment Income 4,438,879 9,119,936 4,582,773
Percent of Return to
Average Carrying Value 4.2% 4.5% 4.6%
Realized Gains 5,260,243 13,198,139 7,537,903
Change in Unrealized Gains $ (5,729,466) $ (14,657,027) $ (4,969,733)
</TABLE>
The $5,729,466 decrease in unrealized gains for the six months of 1999 was com-
posed of a $1,105,360 decrease in market value over cost of the Company's fixed
maturities and a $4,624,106 decrease in market value over cost of the equity
portfolio. Net investment income decreased 3.1%, and the return on average car-
rying value also decreased slightly. Before-tax unrealized gains were
$21,992,908, $27,722,374 and $44,540,225 as of June 30, 1999, December 31, 1998
and June 30, 1998.
INCOME TAXES
Income tax expense is based on income reported for financial statement purposes
and tax laws and rates in effect for the years presented. Deferred federal in-
come taxes arise from timing differences between the recognition of income de-
termined for financial reporting purposes and income tax purposes. Such timing
differences are related principally to the deferral of policy acquisition costs,
the recognition of unearned premiums, and discounting the claims reserves for
tax purposes. Deferred taxes are also provided on unrealized gains and losses.
LOSS RESERVES
Reserves for losses and loss adjustment expenses reflect the Company's best
estimate of the liability for the ultimate cost of reported claims and incurred
but not reported (IBNR) claims as of the end of each period. The estimates are
based on past claim experience and consider current claim trends as well as so-
cial and economic conditions. The Company's reserve for losses and loss adjust-
ment expenses were $77,740,254 as of June 30, 1999 compared with $78,504,050 as
of December 31, 1998 and $74,364,510 as of June 30, 1998. The overall increase
is a combination of giving consideration for increases in premium volume, in-
creased 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 claims settlements,
acquisition and administrative expenses, investment purchases and dividends to
shareholders. In addition to satisfying obligations and cash outflow through
premium collections, there is cash inflow obtained from interest and dividend
income, maturities and sales of investments. Because cash inflow from premiums
is received in advance of cash outflow required to settle claims, the Company
accumulates funds which it invests pending liquidity requirements. Therefore,
investments represent the majority (83.7%, 85.9% and 84.2% at each respective
period) of the Company's assets. Cash outflow can be unpredictable for two rea-
sons: first, a large portion of liabilities representing loss reserves have un-
certainty regarding settlement dates; and second, there is potential for losses
occurring either individually or in aggregate. As a result, the Company main-
tains adequate short-term investment programs necessary to ensure the availa-
bility of funds. The investment program is structured so that a forced sale li-
quidation of fixed maturities should not be necessary during the course of ordi-
nary business involvement and activities. The Company has no material capital
expenditure commitments.
YEAR 2000
A significant issue facing not only the insurance industry but society as a
whole is potential computer problems related to the approaching year 2000. Older
computer programs were written using two digits ragher than four to define the
applicable year. As a result, those computer programs may misinterpret a date,
using "00" as the year 1900 rather than the year 2000.
Over the past three years the Company has incurred approximately $2.3 million of
expenses in updating its management 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 adjust-
ments 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 disruption
to its business.
The Company has also assessed the potential impact of year 2000 related problems
that may be encountered by our agents and third parties, and determined that
any impact would not be material relative to the operations of the Company. How-
ever, there can be no guarantee that actual results would not differ materially
from those anticipated; therefore, the Company has developed a contingency plan
in the event of a worst-case scenario.
<TABLE>
INSURANCE SUBSIDIARY FINANCIAL STATEMENTS
Statutory Basis as Reported to State Regulatory Authorities
June 30, 1999, December 31, 1998 and June 30, 1998
CAPITOL INDEMNITY CORPORATION June 30, December 31, June 30,
Balance Sheets 1999 1998 1998
<S> <C> <C> <C>
ASSETS
Cash and Invested Assets $220,168,054 $217,813,120 $225,435,791
Other Assets 24,231,724 19,542,328 27,037,916
Total Assets $244,399,778 $237,355,448 $252,473,707
LIABILITIES
Reserve for Losses and Loss Expenses $ 74,883,066 $ 77,094,939 $ 73,220,681
Unearned Premiums 41,315,773 40,814,358 45,575,721
Other Liabilities 18,719,403 16,543,315 23,352,994
Total Liabilities 134,918,242 134,452,612 142,149,396
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 109,481,536 102,902,836 110,324,311
Total Liabilities and Capital $244,399,778 $237,355,448 $252,473,707
Statements of Income
Premiums Earned $ 41,516,233 $ 88,502,969 $ 44,814,531
Underwriting Deductions 35,678,044 82,659,222 42,118,515
Net Underwriting Gain 5,838,189 5,843,747 2,696,016
Investment Income Including Sales 9,395,688 20,967,446 11,478,355
Other Income 128,534 106,675 44,784
Income Tax Expense 4,637,377 7,866,629 3,902,675
Net Income $ 10,725,034 $ 19,051,239 $ 10,316,480
CAPITOL SPECIALTY INSURANCE CORPORATION
Balance Sheets
ASSETS
Cash and Invested Assets $ 5,444,508 $ 5,732,082 $ 6,051,010
Other Assets 81,624 140,872 201,555
Total Assets $ 5,526,132 $ 5,872,954 $ 6,275,969
LIABILITIES
Other Liabilities $ 193,046 $ 7,709 $ 382,199
Total Liabilities 193,046 7,709 382,199
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 5,333,086 5,865,245 5,893,770
Total Liabilities and Capital $ 5,526,132 $ 5,872,954 $ 6,275,969
Statements of Income
Underwriting Deductions 7,040 (1,216) 20,092
Net Underwriting (Loss) Gain (7,040) 1,216 (20,092)
Investment Income Including Sales 813,810 600,404 472,329
Other Income - - 22,987
Income Tax Expense 244,097 122,601 116,706
Net Income $ 562,673 $ 479,019 $ 358,518
</TABLE>
PART II
Other Disclosures
Item 1. Legal Proceedings
Reference is made to footnote number 7 "Contingent
Liabilities" on Page 9 of this report.
Item 2. Changes in Securities
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
Reference is made to the Notice of Annual Meeting of Shareholders
and Proxy Statement for the Annual Meeting of Shareholders which
was held May 17, 1999, both of which are dated April 9, 1999 and
previously filed with the Securities and Exchange Commission and
are incorporated herein as an exhibit by reference.
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
NONE
Item 7. Forward-looking Statements
The Private Securities Litigation Reform Act of 1995 encourages
corporations to provide investors with information about the
company's anticipated performance and provides protection from
liability if future results are not the same as managements ex-
pectations. This document contains certain forward-looking state-
ments that are based on assumptions which management believes
are reasonable, but by their nature, inherently uncertain. Future
results could differ materially from those projected.
CAPITOL TRANSAMERICA CORPORATION
Subsidiaries
Capitol Indemnity Corporation
Capitol Specialty Insurance Corporation
Capitol Facilities Corporation
Board of Directors
Paul J. Breitnauer Michael J. Larson
Vice President and Treasurer Retired, formerly with
Capitol Transamerica Corporation American National Bank
Deforest, Wisconsin Madison, Wisconsin
Larry Burcalow Reinhart H. Postweiler
Owner and President Retired-formerly with
Yahara Materials, Inc. Flad Affiliated Corp.
Middleton, Wisconsin Madison, Wisconsin
George A. Fait Kenneth P. Urso
Chairman of the Board Owner and Operator
and President Urso and Associates, LLC
Capitol Transamerica Corporation Middleton, Wisconsin
Madison, Wisconsin
Officers
George A. Fait Virgiline M. Schulte
Chairman of the Board and President Secretary
Paul J. Breitnauer Jane F. Endres
Vice President and Treasurer Assistant Secretary
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the under-
signed thereunto duly authorized.
CAPITOL TRANSAMERICA CORPORATION
George A. Fait
Chairman of the Board and President
Paul J. Breitnauer
Vice President and Treasurer
Date: August 13, 1999
EXHIBIT I
CAPITOL TRANSAMERICA CORPORATION
ANNOUNCES RECORD SIX MONTHS EARNINGS
FOR IMMEDIATE RELEASE Contact: Paul J. Breitnauer
Phone (608) 231-4450
Madison, Wisconsin, July 28, 1999- George A. Fait, Chairman of Capitol
Transamerica Corporation, announced that six months earnings were $11.3 million
($1.00 per share) compared with six months earnings of $10.5 million ($0.93 per
share) in 1998. Six months income in 1999 included $3.5 million or $0.31 per
share of after-tax realized investment gains while the six months income in 1998
included $5.0 million or $0.44 per share of after-tax realized gains. Excluding
realized gains, net income for the six months of 1999 was $0.69 per share com-
pared with $0.49 per share for the same period last year, a 40.8% increase. Un-
less otherwise noted, all per share amounts are presented on a diluted basis.
Second quarter 1999 earnings were $6.7 million or $0.60 per share compared
with 1998 second quarter earnings of $7.0 million or $0.63 per share. Second
quarter 1999 earnings included $0.17 per share of after-tax realized gains,
whereas the second quarter of 1998 included $0.39 per share. Excluding net
realized gains, second quarter 1999 and 1998 net income was $0.43 and $0.24 per
share, respectively, a 79.2% increase.
Six months gross premiums written for 1999 were $44.7 million compared
with $46.5 million for the first six months of 1998. Gross premiums written for
the second quarter increased from $24.8 million in 1998 to $25.3 million for
the like period in 1999, an increase of 2.2%. Although market conditions con-
tinue to adversely affect premium writings for the Company as well as the in-
dustry as a whole, the implementation of new coverages and marketing efforts
have begun to reverse the negative trend seen in 1998 and the first quarter of
1999.
Net investment income for the first six months of 1999 was $4.4 million
compared to $4.6 million for the same period of 1998. Net investment income for
the second quarter was $2.3 million for both 1999 and 1998.
Shareholders' investment continued its steady climb, increasing from $141.3
million ($12.59 per share) at December 31, 1998 to $147.6 million ($13.10 per
share) at June 30, 1999, an increase of 4.5%. Unrealized investment gains were
$22.0 million before tax and $14.3 million after tax at June 30, 1999. Total
invested assets remained virtually unchanged in the first six months of 1999,
reaching $238.4 million at June 30, 1999 versus $238.1 million at December 31,
1998. Cash dividends paid totaled $1.6 million or $0.14 per share.
The Company's combined net loss, loss expense and general expense ratio
for the first six months of 1999 was 84.6% compared with 94.1% for the like
period in 1998. The Company's experience continues to be very favorable compared
to the industry average of 104.2% for the first quarter of 1999 and 107.4% for
the year of 1998.
Fait reported that "The Company has turned in a solid six month performance
and the outlook for the remainder of the year is positive and on track with fi-
nancial goals. The combined ratio has lowered to a level more typical of the
Company's operations, which has allowed us to show a substantial underwriting
profit despite relatively flat premium writings. During the full year 1998 and
the first six months of 1999, the Company did a complete re-underwriting of its
entire book of business, which in turn caused our six month premium writings to
be below initial projections. The second quarter started to show a substantial
increase over the previous year, and with the implementation of our new products
and marketing initiatives we are optimistic that this upward trend will continue
for the rest of the year."
Capitol Transamerica Corporation is an insurance holding company operating
a national insurance business writing specialty lines of commercial property
and casualty policies as well as fidelity and surety coverages through its sub-
sidiary insurance companies Capitol Indemnity Corporation and Capitol Specialty
Insurance Corporation. A third subsidiary, Capitol Facilities Corporation, pro-
vides premium financing for the insurance companies.
The Capitol Transamerica Group operates in 37 states and is rated A+
(Superior) by A.M. Best Company, Inc., an independent organization that analyzes
the insurance industry.
Capitol Transamerica Corporation, with 11.3 million shares outstanding, is
traded on the National Over-the-Counter Stock Market under the symbol CATA.
FINANCIAL HIGHLIGHTS FOLLOW
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share)
<CAPTION>
Six months ended Three months ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES
Gross premiums written $ 44,659 $ 44,464 $ 25,323 $ 24,789
Net premiums written 42,018 43,722 24,044 23,349
Net premiums earned $ 41,516 $ 44,814 $ 21,004 $ 22,566
EXPENSES
Claims and claim expenses 19,788 26,944 8,098 13,881
Other underwriting expenses 15,143 15,348 8,282 7,624
Total Losses and Expenses Incurred 34,931 42,292 16,380 21,505
Underwriting income 6,585 2,522 4,624 1,061
Investment income 4,439 4,583 2,294 2,287
Realized investment gains 5,260 7,538 2,906 6,641
Other income 129 47 50 22
Income Before Income Tax 16,413 14,692 9,874 10,011
Income tax expense 5,156 4,199 3,142 2,979
NET INCOME $ 11,257 $ 10,493 $ 6,732 $ 7,032
EARNINGS PER SHARE- BASIC $ 1.00 $ 0.94 $ 0.60 $ 0.63
EARNINGS PER SHARE- DILUTED $ 1.00 $ 0.93 $ 0.60 $ 0.63
<CAPTION>
COMPARATIVE FINANCIAL HIGHLIGHTS- Six Months Ended June 30,
1999 1998 1997 1996 1995
Per Share Information
<S> <C> <C> <C> <C> <C>
Income per share-diluted $ 1.00 $ 0.93 $ 0.24 $ 0.67 $ 0.63
Consolidated net income $ 11,257 $ 10,493 $ 2,664 $ 7,432 $ 6,906
Weighted average number of
shares outstanding- diluted 11,253 11,243 11,111 11,066 11,034
Book value per share $ 13.10 $ 12.95 $ 11.18 $ 8.89 $ 7.38
Shareholders' investment $ 147,627 $ 145,307 $ 124,692 $ 98,457 $ 81,595
Dividends paid $ 1,583 $ 1,581 $ 2,699 $ 2,222 $ 1,205
Shares outstanding 11,270 11,217 11,155 11,076 11,055
Company Statistics:
Gross premiums written $ 44,659 $ 44,464 $ 47,449 $ 43,653 $ 33,930
Net investment income $ 4,439 $ 4,583 $ 4,120 $ 3,497 $ 3,112
Invested assets $ 238,382 $ 243,268 $ 208,402 $ 157,949 $ 123,889
Total assets $ 284,729 $ 288,942 $ 252,218 $ 191,135 $ 151,564
Insurance Operating Ratios,
Statutory Basis:
Loss and loss adjustment
expenses: 47.9% 60.4% 61.9% 50.8% 51.1%
Underwriting expenses 36.7% 33.7% 34.8% 32.2% 32.5%
Combined ratios 84.6% 94.1% 96.7% 83.0% 83.6%
20
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
BALANCE SHEETS
(in thousands, except per share)
<CAPTION>
June 30, December 31, June 30
1999 1998 1998
ASSETS
<S> <C> <C> <C>
Investments
Available-for-sale investments at fair value
U.S. Government bonds (cost $42, $51 and
$54, respectively) $ 45 $ 56 $ 59
State and municipal bonds (cost $73,514,
$67,340 and $66,334, respectively) 78,691 74,182 70,603
Corporate bonds (cost $878, $820 and
$818, respectively) 849 824 867
Common stock (cost $121,537, $115,583 and
$110,607, respectively) 137,043 135,373 148,728
Preferred stock (cost $6,184, $6,770 and
$6,270, respectively) 7,521 7,851 8,367
Investment real estate 10,283 10,000 8,695
Short-term investments 3,950 9,855 5,949
Total Investments 238,382 238,141 243,268
Cash 1,128 1,544 591
Due from securities brokers 4,219 1,634 5,212
Receivables 23,567 19,952 23,602
Other assets 17,433 16,089 16,239
TOTAL ASSETS $284,729 $277,360 $288,942
LIABILITIES
Reserves for losses and loss adjustment expenses $ 77,740 $ 78,504 $ 74,365
Unearned premiums 42,363 41,542 46,264
Other liabilities 16,999 15,998 23,005
TOTAL LIABILITIES $137,102 $136,044 $143,634
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
15,000 shares, issued 11,538, 11,529 and
11,523 shares, respectively $ 11,538 $ 11,529 $ 11,523
Paid-in surplus 22,589 22,246 22,202
Accumulated other comprehensive income, net
of deferred taxes of $7,698, $9,703
and $15,144, respectively 14,295 18,020 29,397
Retained earnings 99,700 90,016 82,656
Less treasury stock, 268, 307, and 306 shares,
respectively, at cost (495) (495) (470)
TOTAL SHAREHOLDERS' EQUITY 147,627 141,316 145,308
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $284,729 $277,360 $288,942
SHAREHOLDERS' EQUITY PER SHARE $ 13.10 $ 12.59 $ 12.95
SHARES OUTSTANDING 11,270 11,222 11,217
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 79,584,894
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 144,563,791
<MORTGAGE> 0
<REAL-ESTATE> 10,282,768
<TOTAL-INVEST> 238,381,768
<CASH> 1,128,175
<RECOVER-REINSURE> 2,749,652
<DEFERRED-ACQUISITION> 14,115,040
<TOTAL-ASSETS> 284,728,574
<POLICY-LOSSES> 77,740,254
<UNEARNED-PREMIUMS> 42,363,069
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 11,538,322
0
0
<OTHER-SE> 136,088,504
<TOTAL-LIABILITY-AND-EQUITY> 284,728,574
41,516,233
<INVESTMENT-INCOME> 4,438,879
<INVESTMENT-GAINS> 5,260,243
<OTHER-INCOME> 129,070
<BENEFITS> 19,788,214
<UNDERWRITING-AMORTIZATION> (590,263)
<UNDERWRITING-OTHER> 15,062,077
<INCOME-PRETAX> 16,413,681
<INCOME-TAX> 5,156,234
<INCOME-CONTINUING> 11,257,447
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,257,447
<EPS-BASIC> 1.00
<EPS-DILUTED> 1.00
<RESERVE-OPEN> 78,504,050
<PROVISION-CURRENT> 13,195,612
<PROVISION-PRIOR> 6,592,602
<PAYMENTS-CURRENT> 6,521,091
<PAYMENTS-PRIOR> 14,030,919
<RESERVE-CLOSE> 77,740,254
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
