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 March 31, 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 (15) and low price (14 1/8), the
aggregate market value of voting stock held by non-affiliates of the registrant
as of March 31, 1999 was approximately $163,515,978.
Indicate the number of shares of each of the issuer's class of common stock, as
of the latest practicable date:
At March 31, 1999
Common Stock, $1.00 Par Value;
Issued: 11,535,761
Outstanding: 11,228,565
Total Pages: 21
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Part I
Financial Information Page
Consolidated Financial Statements 3 - 7
Notes to Consolidated Financial Statements 8 - 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10 - 12
Condensed Statutory Financial
Statements of Insurance Subsidiaries 13
Part II
Other Information
Other Disclosures 15
Officers and Directors 16
Signatures 17
Exhibit 1 (Press Release) 18 - 21
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
<S> <C> <C> <C>
ASSETS
Investments:
Available-for-sale investment securities, at fair value
U.S. Government bonds (amortized cost $46,285, $51,204
and $65,765, respectively) $ 50,162 $ 55,350 $ 70,641
State, municipal and political subdivision bonds (amortized
cost $71,264,659, $67,339,664 and $65,899,343, respectively) 77,268,888 74,182,001 70,772,667
Corporate bonds and notes (amortized cost $627,419,
$819,678 and $817,442, respectively) 603,240 824,109 468,849
Equity securities:
Common stock (cost $116,941,403, $115,583,088 and
$111,773,734, respectively) 125,422,809 135,373,036 162,178,627
Nonredeemable preferred stock (cost $5,883,941, $6,769,703
and $6,197,248, respectively) 7,166,883 7,851,215 8,336,338
Investment real estate, at cost, net of depreciation 10,138,901 9,999,919 8,206,367
Short-term investments, at cost which
approximates fair value 11,494,374 9,854,962 4,022,640
Total Investments 232,145,257 238,140,592 254,056,129
Cash 566,618 1,544,438 690,143
Accrued investment income 1,817,278 1,678,998 1,678,658
Receivables from agents, insureds and others, less allowance for
doubtful accounts of $515,000, $500,000 and $455,000, respectively 16,040,124 17,217,646 20,227,064
Balances due from reinsurers 2,382,245 913,186 1,287,480
Funds held by ceding reinsurers 35,756 35,756 -
Federal income taxes recoverable - 141,982 -
Deferred insurance acquisition costs 13,853,454 13,524,777 13,617,162
Prepaid reinsurance premiums 803,043 727,074 694,821
Due from securities brokers 4,419,550 1,633,833 -
Other assets 1,865,252 1,801,315 1,638,632
Total Assets $273,928,577 $277,359,597 $293,890,089
</TABLE>
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
<S> <C> <C> <C>
LIABILITIES
Policy liabilities and accruals:
Reserve for losses $ 59,014,448 $ 55,336,376 $ 51,751,775
Reserve for loss adjustment expenses 22,986,838 23,167,674 22,741,983
Unearned premiums 39,079,570 41,541,432 45,487,384
Total Policy Liabilities and Accruals 121,080,856 120,045,482 119,981,142
Accounts payable 3,238,492 3,340,980 2,411,527
Claim drafts outstanding 2,656,117 2,836,566 3,423,235
Due to securities brokers 2,152,923 231,185 -
Balances due to reinsurers 1,610,379 1,038,967 1,945,913
Accrued premium taxes 178,155 237,171 260,447
Federal income taxes payable 1,404,733 - 616,227
State income taxes payable 76,097 91,444 115,178
Deferred income taxes 4,220,295 8,221,829 18,031,614
Total Other Liabilities 15,537,191 15,998,142 26,804,141
Total Liabilities 136,618,047 136,043,624 146,785,283
SHAREHOLDERS' INVESTMENT
Common stock, $1.00 par value, authorized 15,000,000 shares,
issued 11,535,761, 11,529,376 and 11,524,002, respectively 11,535,761 11,529,376 11,524,002
Paid-in surplus 22,278,651 22,246,366 21,912,129
Accumulated other comprehensive income, net of deferred taxes
of $5,511,896, $9,702,829 and $19,405,021, respectively 10,236,379 18,019,545 37,668,568
Retained earnings 93,755,298 90,016,245 76,409,332
Shareholders' investment before treasury stock 137,806,089 141,811,532 147,514,031
Treasury stock, 307,196, 307,196 and 324,016 shares,
respectively, at cost (495,559) (495,559) (409,225)
Total Shareholders' Investment 137,310,530 141,315,973 147,104,806
Total Liabilities and Shareholders' Investment $273,928,577 $277,359,597 $293,890,089
Book Value Per Share $ 12.23 $ 12.59 $ 13.13
Shares Outstanding 11,228,565 11,222,180 11,199,986
</TABLE>
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For The Three Months Ended March 31, 1999 and 1998
<CAPTION>
1999 1998
<S> <C> <C>
REVENUES
Premiums earned $ 20,511,600 $ 22,248,261
Net investment income 2,145,330 2,295,831
Realized investment gains 2,354,246 896,552
Other revenues 78,626 26,945
Total Revenues 25,089,802 25,467,589
LOSSES AND EXPENSES INCURRED
Losses incurred 9,766,940 11,433,308
Loss adjustment expenses incurred 1,923,299 1,629,775
Underwriting, acquisition and
insurance expenses 6,862,781 6,811,295
(Increase) decrease in deferred insurance
acquisition costs (328,677) 569,779
Other expenses 326,398 343,168
Total Losses and Expenses Incurred 18,550,741 20,787,325
Income from operations before
income taxes 6,539,061 4,680,264
Income tax expense (benefit)
Current 1,824,610 1,417,023
Deferred 189,399 (197,300)
2,014,009 1,219,723
Net Income $ 4,525,052 $ 3,460,541
INCOME PER SHARE - BASIC $ 0.40 $ 0.31
Weighted Average Number of Shares Outstanding - Basic 11,216,162 11,168,127
INCOME PER SHARE - DILUTED $ 0.40 $ 0.31
Weighted Average Number of Shares Outstanding - Diluted 11,259,274 11,264,321
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS INVESTMENT
AND COMPREHENSIVE INCOME
<CAPTION>
Common Accumulated
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 adjustment,
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 adjustment,
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)
Comprehensive income
Net income - - - 4,525,052 - 4,525,052 -
Other comprehensive income
Unrealized depreciation on
available-for-sale securities,
net of deferred taxes - - - (6,252,906) - - -
Less: reclassification adjustment,
net of tax of $823,986, for
gain included in net income - - - (1,530,260) - - -
Other comprehensive income - - - (7,783,166) (7,783,166) - -
Comprehensive income - - - (3,756,841) - - -
Stock options exercised 6,385 - 32,285 - - - -
Cash dividends declared - - - - - (785,999) -
Balance, March 31, 1999 $11,535,761 $ - $22,278,651 $ - $10,236,379 $93,755,298 (495,559)
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
March 31, December 31, March 31,
1999 1998 1998
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net Income $ 4,525,052 $ 19,423,913 $ 3,460,541
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 254,194 1,195,955 253,594
Realized investment gains (2,354,246) (13,198,139) (896,552)
Change in:
Deferred insurance acquisition costs (328,677) 662,164 569,779
Unearned premiums (2,461,862) (5,870,417) (1,924,465)
Allowance for doubtful accounts receivable from agents 15,000 60,000 15,000
Accrued investment income (138,280) 28,694 29,034
Receivables from agents, insureds and others 1,162,522 3,542,835 578,417
Balances due to/from reinsurers 575,235 (191,361) 553,015
Reinsurance recoverable on paid and unpaid losses (1,472,882) (897,506) (1,109,230)
Funds held by ceding reinsurers - (35,756) 43,235
Income taxes payable 1,531,368 633,804 1,415,747
Deferred income taxes 189,399 (304,896) (197,301)
Due to/from securities brokers (863,979) (6,721,020) (5,318,372)
Prepaid reinsurance premiums (75,969) 16,914 49,167
Other assets (85,247) (5,305) 23,908
Reserve for losses and loss adjustment expenses 3,497,236 7,031,712 3,021,420
Accounts payable (282,937) 371,977 29,194
Accrued premium taxes (59,016) (99,992) (76,716)
Net cash provided by operating activities 3,626,911 5,643,576 519,415
Cash flows provided by (used for) investing activities:
Proceeds from sales of available-for-sale investments 6,703,954 40,484,195 5,817,238
Purchases of available-for-sale investments (13,116,561) (49,573,482) (7,044,564)
Maturities of available-for-sale investments 2,703,969 7,660,719 1,207,794
Purchase of depreciable assets (148,764) (1,080,065) (322,416)
Net cash used for investing activities (3,857,402) (2,508,633) (341,948)
Cash flows provided by (used for) financing activities:
Cash dividends paid (785,999) (3,139,786) (783,327)
Stock options exercised 38,670 441,017 101,405
Net proceeds from sale of treasury stock - (94,284) (7,950)
Net cash used for financing activities (747,329) (2,793,053) (689,872)
Net (decrease) increase in cash (977,820) 341,890 (512,405)
Cash, beginning of period 1,544,438 1,202,548 1,202,548
Cash, end of period $ 566,618 $ 1,544,438 $ 690,143
Cash paid during the year for:
Income taxes $ 858,200 $ 8,358,132 $ 1,100,781
</TABLE>
CAPITOL TRANSAMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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> March 31,
1999 1998
<S> <C> <C>
Numerator:
Consolidated net income $ 4,525,052 $ 3,460,541
Denominator:
Denominator for basic EPS - weighted average shares 11,216,162 11,168,127
Effect of dilutive securities - employee stock options 43,112 96,194
Denominator for diluted EPS 11,259,274 11,264,321
</TABLE>
(3) Income Taxes
Deferred income taxes reflect the net tax effects of temporary differ-
ences between the carrying amounts of assets and liabilities for finan-
cial statement purposes and the amounts used for income taxes.
(4) Common Stock Options
There were 6,385 options exercised during the three months ended March
31, 1999 and there were 21,482 options exercised during the three
months ended March 31, 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 February 26, 1999 a cash dividend of $.07 per share was declared to
shareholders of record March 12, 1999 and paid March 26 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 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 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 in the amount of
$785,191.
On February 27, 1998 a cash dividend of $.07 per share was declared to
shareholders of record March 13, 1998 and paid March 27 in the amount
of $783,327.
(6) Investments
Fixed maturities and equity securities are classified as available-for-
sale and, accordingly, are carried at fair value, with unrealized gains
and losses reported as a separate component of shareholders' invest-
ment, net of taxes. The cost of fixed maturities is adjusted for amor-
tization of premiums and accretion of discounts to maturity. Fixed ma-
turities and equity securities deemed to have declines in value that
are other than temporary are written down through the statement of in-
come to carrying values equal to their estimated fair values.
Investment real estate is carried at cost net of accumulated deprecia-
tion of $873,885, $789,597 and $512,533 as of March 31, 1999, December
31, 1998 and March 31, 1998, respectively. The real estate is de-
preciated over the estimated useful life of the asset.
Cost of investments sold is determined under the specific identifica-
tion method.
(7) Contingent Liabilities
The Company is a defendant in certain lawsuits involving complaints
which demand damages and recoveries for claims and losses alledgedly
related to risks insured by the Company. In the opinion of management,
such lawsuits are routine in that they result from the ordinary course
of business in the insurance industry. The reserve for losses includes
management's estimates of the probable ultimate cost of settling all
losses involving lawsuits.
(8) Industry Segment Disclosures
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Standards No. 131, "Disclo-
sures about Segments of an Enterprise and Related Information." The
adoption of SFAS No. 131 did not affect results of operations or finan-
cial 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) prop-
erty and casualty, (2) fidelity and surety, and (3) discontinued re-
insurance assumed operations. These segments constitute 100% of the
operations of the Company. Data for each segment as required for in-
terim reporting follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31, March 31,
1999 1998 1997
<S> <C> <C> <C>
Total Revenues
Property & Casualty $17,215,139 $17,253,335 $15,131,587
Fidelity & Surety 4,840,719 5,992,016 5,959,298
Reinsurance Assumed 171,186 110,136 76,866
Totals: $22,227,044 $23,355,487 $21,167,751
Before-tax Profit (Loss):
Property & Casualty $ 4,684,629 $ 4,215,351 $ 1,038,979
Fidelity & Surety (1,078,525) (1,063,317) 1,357,335
Reinsurance Assumed 139,475 42,152 (1,312,433)
Totals: $ 3,745,579 $ 3,194,186 $ 1,083,881
Reconciliation to Con-
solidated GAAP:
Capital and Surplus 2,327,809 1,718,987 1,320,484
Inter-company adjustments 465,673 (232,909) 69,977
Consolidated NIBT: $ 6,539,061 $ 4,680,264 $ 2,474,342
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.
</TABLE>
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 awarding
against insurance companies. Unfortunately for the insurance industry, the trend
of increasing price competition has continued as has the number of significant
natural disasters. This combination has resulted in considerable reduction in
underwriting profitability for the industry as a whole.
Adequate premium rates continue to be of concern to the Company and the
property casulaty industry as a whole. Management feels strongly that rate reg-
ulators 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
Company's niche market, has presented an unprecedented challenge to management.
The Company has responded to this challenge with increased marketing 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 section, the property-casualty insurance industry
is in a downward cycle. Indeed, in the first quarter the Company saw a continu-
ation of the decrease in premium writings that began in 1998. However, the in-
creased claim activity that the Company experienced in 1997 has stabilized, as
indicated by the decrease in the loss ratio. The expense portion of the com-
bined 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 conditions and restore the
Company's trend of increasing underwriting profits.
For the quarter ended March 31, 1999 gross premiums written totaled $19,335,808,
down 10.8% over the $21,674,896 written in the first quarter 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 become 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 $20,511,600, $88,502,969 and
$22,248,261 for the respective periods; and net unearned premiums were
$39,079,570, $40,814,358 and $45,487,384 at each respective period.
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
<S> <C> <C> <C>
Gross Premiums Written $19,335,808 $87,802,645 $21,674,896
Reinsurance Ceded 1,362,039 5,153,179 1,301,933
Net Premiums Written $17,973,769 $82,649,466 $20,372,963
Net Premiums Earned $20,511,600 $88,502,969 $22,248,261
Net Unearned Premium Reserve $39,079,570 $40,814,358 $45,487,384
The Company's underwriting results can be measured by reference to the com-
bined loss and expense ratios. This tabulation includes the operating results
of the two subsidiary insurance companies on a statutory basis. Losses and
loss adjustment expenses are stated as a ratio of net premiums earned, while
underwriting expenses are stated as a ratio of net premiums written. The
combined ratios were as follows:
<CAPTION>
March 31, December 31, March 31,
Insurance Operating Ratios (Statutory Basis): 1999 1998 1998
<S> <C> <C> <C>
Loss and Loss Adjustment Expenses 57.2% 59.4% 59.0%
Underwriting Expenses 39.4% 35.6% 34.6%
Combined Ratios 96.6% 95.0% 93.6%
The Company's combined ratio continues to compare favorably with the commercial
lines 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>
March 31, December 31, March 31,
Investments: 1999 1998 1998
<S> <C> <C> <C>
Invested Assets $ 232,145,257 $ 238,140,592 $ 254,056,129
Net Investment Income 2,145,330 9,119,936 2,295,831
Percent of Return to
Average Carrying Value 4.0% 4.5% 4.7%
Realized Gains 2,354,246 13,198,139 896,552
Change in Unrealized Gains $ (7,783,166) $(14,657,027) $ 7,563,631
</TABLE>
The $7,783,166 decrease in unrealized gains for the first quarter of 1999 was
composed of a $563,542 decrease in market value over cost of the Company's
fixed maturities and a $7,219,624 decrease in market value over cost of the
equity portfolio. Net investment income decreased by 6.5%, and the return on
average carrying value also decreased slightly. Before-tax unrealized gains
were $15,748,275, $27,722,374 and $57,073,589 as of March 31, 1999, December
31, 1998 and March 31, 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 loss and loss adjustment expenses reflect the Company's best esti-
mate of the liability for the ultimate cost of reported claims and incurred but
not reported (IBNR) claims as of the end of each period. The estimates are based
on past claim experience and consider current claim trends as well as social and
economic conditions. The Company's reserve for losses and loss adjustment ex-
enses were $82,001,286 as of March 31, 1999 compared with $78,504,050 as of De-
cember 31, 1998 and $74,493,758 as of March 31, 1998. The increase is a combina-
tion of giving consideration for increases in premium volume, increased reten-
tion on all lines of coverages written and an increase in the IBNR reserves.
Management continues to closely monitor the reserve development trends and pro-
jections 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 (84.7%, 85.9% and 86.4% at each respective
period) of the Company's assets. Cash outflow can be unpredictable for two rea-
sons: first, a large portion of liabilities representing loss reserves have un-
certainty regarding settlement dates; and second, there is potential for losses
occurring either individually or in aggregate. As a result, the Company main-
tains adequate short-term investment programs necessary to ensure the availa-
bility of funds. The investment program is structured so that a forced sale li-
quidation of fixed maturities should not be necessary during the course of ordi-
nary business involvement and activities. The Company has no material capital
expenditure commitments.
YEAR 2000
A significant issue facing not only the insurance industry but society as a
whole is potential computer problems related to the approaching year 2000.
Older computer programs were written using two digits rather than four to
define the applicable year. As a result, those computer programs may mis-
interpret a date, using "00" as the year 1900 rather than the year 2000.
Over the past three years the Company has incurred approximately $2.3 million
of expenses in updating its management information 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 adjustments 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 deter-
mined that any impact would not be material relative to the operations of
the Company. However, there can be no guarantee that actual results would
not differ materially from those anticipated; therefore, the Company has de-
veloped a contingency plan in the event of a worst-case scenario.
<TABLE>
INSURANCE SUBSIDIARY FINANCIAL STATEMENTS
Statutory Basis as Reported to State Regulatory Authorities
March 31, 1999, December 31, 1998 and March 31, 1998
CAPITOL INDEMNITY CORPORATION March 31, December 31, March 31,
Balance Sheets 1999 1998 1998
<S> <C> <C> <C>
ASSETS
Cash and Invested Assets $ 212,767,561 $217,813,120 $236,067,041
Other Assets 22,306,767 19,542,328 19,729,181
Total Assets $ 235,074,328 $237,355,448 $255,796,222
LIABILITIES
Reserve for Losses and Loss Expenses $ 79,058,797 $ 77,094,939 $ 73,071,573
Unearned Premiums 38,276,527 40,814,358 44,792,563
Other Liabilities 20,826,258 16,543,315 17,865,273
Total Liabilities 138,161,582 134,452,612 135,729,409
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 96,912,746 102,902,836 120,066,813
Total Liabilities and Capital $ 235,074,328 $237,355,448 $255,796,222
Statements of Income
Premiums Earned $ 20,511,600 $ 88,502,969 $ 22,248,261
Underwriting Deductions 18,814,344 82,659,222 20,289,033
Net Underwriting Gain 1,697,256 5,843,747 1,959,228
Investment Income Including Sales 4,297,147 20,967,446 2,801,965
Other Income 78,985 106,675 24,247
Income Tax Expense 1,812,901 7,866,629 1,224,276
Net Income $ 4,260,487 $ 19,051,239 $ 3,561,164
CAPITOL SPECIALTY INSURANCE CORPORATION
Balance Sheets
ASSETS
Cash and Invested Assets $ 5,506,271 $ 5,732,082 $ 6,422,661
Other Assets 482,834 140,872 3,154,389
Total Assets $ 5,989,105 $ 5,872,954 $ 9,577,050
LIABILITIES
Reserve for Losses and Loss Expenses $ 367,612 $ - $ 358,154
Unearned Premiums - - -
Other Liabilities 8,610 7,709 2,738,029
Total Liabilities 376,222 7,709 3,096,183
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 5,612,883 5,865,245 6,480,867
Total Liabilities and Capital $ 5,989,105 $ 5,872,954 $ 9,577,050
Statements of Income
Premiums Earned $ - $ - $ -
Underwriting Deductions 5,265 (1,216) 2,171
Net Underwriting (Loss) Gain (5,265) 1,216 (2,171)
Investment Income Including Sales 68,293 600,404 72,285
Other Income - - -
Income Tax Expense (Benefit) 2,311 122,601 1,250
Net Income $ 60,717 $ 479,019 $ 68,864
</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
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
Sun Prairie, Wisconsin Madison, Wisconsin
Larry Burcalow Reinhart H. Postweiler
Owner and President Retired, formerly with
Yahara Materials, Inc. Flad Affiliated Corp.
Middleton, Wisconsin Madison, Wisconsin
George A. Fait Kenneth P. Urso
Chairman of the Board Owner and Operator
and President Urso and Associates, LLC
Capitol Transamerica Corporation Middleton, Wisconsin
Madison, Wisconsin
Officers
George A. Fait Virgiline M. Schulte
Chairman of the Board and President Secretary
Paul J. Breitnauer Jane F. Endres
Vice President and Treasurer Assistant Secretary
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: May 6, 1999
CAPITOL TRANSAMERICA CORPORATION
FOR IMMEDIATE RELEASE Contact: Paul J. Breitnauer
Phone (608) 231-4450
CAPITOL TRANSAMERICA CORPORATION
REPORTS FIRST QUARTER EARNINGS
Madison, Wisconsin, April 28, 1999 - Capitol Transamerica Corporation today
announced that net income for the first quarter ended March 31, 1999 was $4.5
million or $.40 per share. This represents a 30.8% increase over net income of
$3.5 million or $.31 per share earned for the same period last year. Unless
otherwise noted, all per share amounts are presented on a diluted basis.
First quarter 1999 net income included after-tax realized investment gains
of $1.5 million or $.14 per share compared with $583,000 or $.05 per share in
1998. Excluding after-tax realized investment gains, net income for the first
quarter was $3.0 million or $.27 per share against $2.9 million or $.26 per
share for the 1998 period.
Market conditions continued to have a negative impact on the premium writ-
ings for the entire insurance industry, as well as the Company. Capitol Trans-
america had a 10.8% decrease in gross premiums written from $21.7 million in
the first quarter of 1998 to $19.3 million this year. The Company has respond-
ed by increasing marketing efforts and commission rates which, when combined
with the lower premiums, has led to a higher expense ratio. Management is con-
fident that these efforts, as well as the introduction of compatible new
coverages, will reverse the recent decline in premium production, caused pri-
marily by rate competition.
Net investment income was relatively unchanged at $2.1 million for the first
quarter of 1999 compared with $2.3 million last year. Total cash and invested
assets decreased to $232.7 million at March 31, 1999 from $239.7 million at
December 31, 1998, which was primarily due to a decrease in market value on
certain stocks in the Company's equity portfolio.
Shareholders' investment at March 31, 1999 was $137.3 million or $12.23 per
share compared with $141.3 million or $12.59 per share at year-end 1998.
The Company's combined net loss, loss expense and general expense ratio for
the first quarter of 1999 was 96.6% compared with 93.6% for the first quarter
of 1998. The Company's overall loss and expense ratio continues to be very
favorable compared to the commercial lines insurers industry average of 107.4%
for the year 1998.
Commenting on the results, George A. Fait, Chairman, stated that "Despite a
difficult quarter from a premium standpoint, the Company showed a respectable
increase in earnings over the first quarter of 1998. The Company is introducing
new programs which are compatible with Capitol Transamerica's history of strong
underwriting gains. We are also expanding our existing coverages into new
states, and applications are pending for admission into additional states."
"The Company re-underwrote the entire surety book of business in late 1997
and during the year 1998." Fait continued. "The large increase in contract
surety premiums written in 1995 and 1996 was leading to increased loss activity
and by re-underwriting the surety book we should return to previous profit-
ability levels of this business segment. We are optimistic that premiums will
resume an upward trend, and that the Company will continue to benefit from the
strong, consistent growth that it has had in the past."
The Annual Meeting of Shareholders is scheduled for May 17 at the Mariott
Inn Madison West in Middleton, Wisconsin.
Capitol Transamerica Corporation is an insurance holding company operating a
national insurance business writing specialty lines of commercial property
and casualty policies as well as fidelity and surety coverages through its
subsidiary insurance companies Capitol Indemnity Corporation and Capitol
Specialty Insurance Corporation. A third subsidiary, Capitol Facilities
Corporation, provides premium financing for the insurance companies.
The Capitol Transamerica Group operates in 37 states and is rated A+ by A.M.
Best Company, Inc., an independent organization that analyzes the insurance
industry.
Capitol Transamerica Corporation, with 11.2 million shares outstanding, is
traded on the National Over-the-Counter Stock Market under the symbol CATA.
FINANCIAL HIGHLIGHTS FOLLOW
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
(in thousands, except per share)
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three months ended March 31,
1999 1998
<S> <C> <C>
REVENUES
Gross premiums written $ 19,336 $ 21,675
Net premiums written 17,974 20,373
Net premiums earned $ 20,512 $ 22,248
EXPENSES
Claims and claim expenses 11,690 13,063
Other underwriting expenses 6,861 7,724
Total Losses and Expenses Incurred 18,551 20,787
Underwriting income 1,961 1,461
Investment income 2,145 2,296
Realized investment gains 2,354 897
Other income 79 27
Income from Operations Before
Income Tax 6,539 4,681
Income tax expense 2,014 1,220
NET INCOME $ 4,525 $ 3,461
EARNINGS PER SHARE - BASIC $ 0.40 $ 0.31
EARNINGS PER SHARE - DILUTED $ 0.40 $ 0.31
<CAPTION>
COMPARATIVE FINANCIAL HIGHLIGHTS- Three Months Ended March 31,
1999 1998 1997 1996 1995
Per Share Information
<S> <C> <C> <C> <C> <C>
Income per share - diluted $ 0.40 $ 0.31 $ 0.18 $ 0.30 $ 0.27
Consolidated net income $ 4,525 $ 3,641 $ 2,040 $ 3,280 $ 3,033
Weighted average number
of shares outstanding
- diluted 11,259 11,264 11,251 11,058 11,123
Book value per share $ 12.23 $ 13.13 $ 10.28 $ 8.56 $ 6.65
Shareholders' investment $ 137,311 $ 147,105 $ 114,669 $ 94,811 $ 73,434
Dividends paid $ 792 $ 790 $ 1,911 $ 1,476 $ 535
Shares outstanding 11,229 11,200 11,150 11,073 11,040
Company Statistics:
Gross premiums written $ 19,336 $ 21,675 $ 20,287 $ 18,877 $ 14,903
Net investment income $ 2,145 $ 2,296 $ 2,147 $ 1,710 $ 1,543
Invested assets $ 232,145 $ 254,056 $ 189,338 $ 151,217 $ 114,977
Total assets $ 273,929 $ 293,890 $ 226,628 $ 180,339 $ 137,306
Insurance Operating Ratios,
Statutory Basis:
Loss and loss adjustment
expenses: 57.2% 59.0% 61.4% 49.9% 50.4%
Underwriting expenses 39.4% 34.6% 36.7% 34.5% 33.8%
Combined ratios 96.6% 93.6% 98.1% 84.4% 84.2%
20
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
BALANCE SHEETS
(in thousands, except per share)
<CAPTION>
March 31, March 31
1999 1998
ASSETS
<S> <C> <C>
Investments
Available-for-sale investments at fair value
U.S. Government bonds (cost $46, and
$66, respectively) $ 50 $ 71
State and municipal bonds (cost $71,265,
and $65,899, respectively) 77,269 70,373
Corporate bonds (cost $627, and $817,
respectively) 603 869
Common stock (cost $116,941, and $111,774,
respectively) 125,423 162,179
Preferred stock (cost $5,884, and $6,197,
respectively) 7,167 8,336
Investment real estate 10,139 8,206
Short-term investments 11,494 4,022
Total Investments 232,145 254,056
Cash 567 690
Receivables 24,659 23,193
Other assets 16,558 15,951
TOTAL ASSETS $273,929 293,890
LIABILITIES
Reserves for losses and loss adjustment expenses $ 82,001 $ 74,494
Unearned premiums 39,080 45,487
Other liabilities 15,537 26,804
TOTAL LIABILITIES $136,618 $146,785
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
15,000 shares, issued 11,536 and
11,524 shares, respectively $ 11,536 $ 11,524
Paid-in surplus 22,279 21,912
Unrealized appreciation on securities carried
at fair value, net of deferred taxes of
$5,512 and $19,405, respectively 10,236 37,669
Retained earnings 93,755 76,409
Less treasury stock, 307, and 324 shares,
respectively, at cost (495) (409)
TOTAL SHAREHOLDERS' EQUITY 137,311 147,105
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $273,929 $293,890
SHAREHOLDERS' EQUITY PER SHARE $ 12.23 $ 13.13
SHARES OUTSTANDING 11,229 11,200
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 77,922,290
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 132,589,692
<MORTGAGE> 0
<REAL-ESTATE> 10,138,901
<TOTAL-INVEST> 232,145,257
<CASH> 566,618
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 13,853,454
<TOTAL-ASSETS> 273,928,577
<POLICY-LOSSES> 82,001,286
<UNEARNED-PREMIUMS> 39,079,570
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 11,535,761
0
0
<OTHER-SE> 125,774,769
<TOTAL-LIABILITY-AND-EQUITY> 273,928,577
20,511,600
<INVESTMENT-INCOME> 2,145,330
<INVESTMENT-GAINS> 2,354,246
<OTHER-INCOME> 78,626
<BENEFITS> 11,690,239
<UNDERWRITING-AMORTIZATION> (328,677)
<UNDERWRITING-OTHER> 7,189,179
<INCOME-PRETAX> 6,539,061
<INCOME-TAX> 2,014,009
<INCOME-CONTINUING> 4,525,052
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,525,052
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
<RESERVE-OPEN> 78,504,050
<PROVISION-CURRENT> 4,752,509
<PROVISION-PRIOR> 6,937,730
<PAYMENTS-CURRENT> 1,322,574
<PAYMENTS-PRIOR> 6,870,429
<RESERVE-CLOSE> 82,001,286
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
