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, 1999 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 (11 11/16) and asked price (11 13/16),
the aggregate market value of voting stock held by non-affiliates of the regi-
strant as of March 10, 2000 was approximately $132,551,691.
Indicate the number of shares of each of the issuer's class of common stock, as
of the latest practicable date:
At March 10, 2000
Common Stock, $1.00 Par Value
Issued: 11,558,166
Outstanding: 11,280,995
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 15, 2000 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 $257 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 fi-
delity and surety bonds and specialty insurance coverages, while CSIC has
been largely inactive due to market conditions. CIC operates on an admit-
ted 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, 1999 and
1998, 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 1999, 1998 or 1997. During
1999, 1998 and 1997, direct premiums written in Wisconsin accounted for
approximately 19%, 17% and 17%, respectively, and direct premiums written
in Illinois accounted for approximately 14%, 14% and 13%, respectively, of
the total direct premiums written by the Company. No other state exceeded
10%.
(c) Narrative Description of Business
Competitive Conditions:
Commercial property-casualty insurance 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, 1999, CIC reported $91.6 million surplus as regards policy-
holders, approximately $71.6 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 $99.2 million at December 31, 1999.
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>
1999
Gross Ceded Net
<S> <C> <C> <C>
Accident and Health $ 1,783,585 $1,493,857 $ 289,728
Burglary and Glass 8,043 - 8,043
Fidelity 1,529,920 77,098 1,452,822
Fire and Allied Lines 219,222 3,986 215,236
Inland Marine 523,766 383,631 140,135
Liability 8,086,932 163,639 7,923,293
Commercial Multiple Peril 50,787,804 2,734,476 48,053,328
Workers' Compensation 4,549,679 - 4,549,679
Surety 18,513,849 952,737 17,561,112
$86,002,800 $5,809,424 $80,193,376
<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 & Health $ 238,615 $ - $ 238,615
Burglary and Glass 32,189 - 32,189
Fidelity 1,317,643 25,958 1,291,685
Fire and Allied Line 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 & Health $ 222,137 $ - $ 222,137
Burglary and Glass 52,045 - 52,045
Fidelity 1,355,259 66,854 1,288,405
Fire and Allied Line 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
</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>
1999 1998 1997
<S> <C> <C> <C>
Balances as of January 1, $ 78,504,050 $ 71,472,338 $ 47,702,363
Reinsurance balances (1,101,770) (594) 225,367
Net reserves 77,402,280 71,471,744 47,927,730
Incurred losses and loss adjustment expenses related to:
Current year 47,749,455 49,862,090 43,042,827
Prior years:
Direct losses (net of recoveries) (562,627) 4,091,923 10,725,730
Direct loss adjustment expenses (net of recoveries) (2,379,899) (1,956,631) 2,141,661
Discontinued assumed reinsurance 493,912 379,732 5,218,184
Total prior years (2,448,614) 2,515,024 18,085,575
Total incurred 45,300,841 52,377,114 61,128,402
Paid losses and loss adjustment expenses related to:
Current year 18,642,962 20,035,517 16,327,601
Prior years 26,682,489 26,370,166 21,160,666
Total paid 45,325,451 46,405,683 37,488,267
Other adjustments, net - (40,895) (96,121)
Net balance at December 31 77,377,670 77,402,280 71,471,744
Reinsurance recoverables (121,478) 1,101,770 594
Balance at December 31, $ 77,256,192 $ 78,504,050 $71,472,338
(g) Loss Reserve Development
<CAPTION>
Year ended: 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for losses and loss
adjustment expense $ 14.1 $ 14.5 $ 18.1 $ 19.3 $ 27.5 $ 38.5 $ 47.7 $ 71.5 $ 78.5 $ 77.3
Re-estimated reserves:
One year later 15.0 19.5 21.2 25.5 33.8 43.4 65.8 75.1 74.9
Two years later 18.3 21.3 23.8 31.2 37.5 57.7 65.9 72.0 -
Three years later 19.9 22.7 28.3 33.5 51.4 56.2 65.6 - -
Four years later 21.3 25.9 30.7 43.6 48.2 54.4 - - -
Five years later 23.8 27.9 38.6 42.7 45.3 - - - -
Six years later 25.6 34.7 38.0 40.0 - - - - -
Seven years later 31.6 34.2 37.1 - - - - - -
Eight years later 31.7 34.2 - - - - - - -
Nine years later 31.8 - - - - - - - -
Cumulative deficiency (17.7) (19.7) (19.0) (20.7) (17.8) (15.9) (17.9) (0.5) 3.6
Cumulative deficiency from
discontinued reinsurance
assumed operations (14.3) (13.5) (12.3) (11.3) (10.2) (9.3) (7.8) (6.5) (0.9)
Cumulative (deficiency)
redundancy from
continuing operations (3.4) (6.2) (6.7) (9.4) (7.6) (6.6) (10.1) 6.0 4.5
Cumulative amount of liability paid through:
One year later 5.7 7.6 9.4 9.9 12.2 16.2 21.2 26.4 26.7
Two years later 10.1 12.7 14.1 17.2 21.4 26.6 34.6 40.5 -
Three years later 13.4 15.4 18.9 23.6 27.5 34.2 44.3 - -
Four years later 15.2 18.7 23.0 27.0 31.7 38.4 - - -
Five years later 17.5 21.6 25.0 28.7 33.3 - - - -
Six years later 19.7 22.8 26.5 29.5 - - - - -
Seven years later 20.6 23.9 27.2 - - - - - -
Eight years later 21.6 24.5 - - - - - - -
Nine years later 22.2 - - - - - - - -
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 1999 1998 1997
State of Wisconsin:
<S> <C> <C> <C>
- CIC $ 77,044,646 $ 77,094,939 $ 71,117,787
- CSIC - 367,612 -
Funds withheld from reinsurers, reclassified
to loss reserves on a GAAP basis 412,481 408,516 447,658
Reserve for return of disability premiums,
reclassified to loss reserves on a GAAP basis 19,517 24,064 18,686
GAAP adjustment to gross up reserves
for the effect of reinsurance (185,866) 669,190 594
Other, net (34,586) (60,271) (112,387)
Balance, December 31, on a GAAP basis $ 77,256,192 $ 78,504,050 $ 71,472,338
</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 40,936 square feet occupying all or a portion of the
1st, 2nd, 6th, and 9th through 14th floors. The term of the lease is
from June 1, 1999 through August 31, 2002.
The Company also leases approximately 2,900 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 February 1, 1998 to January 31,
2001.
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, 1999, 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, 1999.
Item 5. Market Information, Dividends and Other Information
On March 10, 2000, 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 1999 was a low of 9 1/2 and a
high of 19 1/2 with the equivalent of 2.2 million shares traded.
Quarterly high and low quoted prices, which are obtained from the National As-
sociation of Securities Dealers, are illustrated below.
<TABLE>
<CAPTION>
1999 1998
Quarter High Low Dividends High Low Dividends
<S> <C> <C> <C> <C> <C> <C>
First 19 1/2 14 1/8 $.07 22 1/4 19 3/4 $.07
Second 15 3/8 12 1/2 .07 21 7/16 19 .07
Third 15 1/4 13 5/16 .07 22 3/4 16 3/4 .07
Fourth 14 9 1/2 .07 20 1/4 15 .07
Year 19 1/2 9 1/2 $.28 22 3/4 15 $.28
For the period January 1 through March 10, 2000, the high ask price was 12 3/4
and the low bid price was 9 3/8. A regular cash dividend of $.07 per share was
paid on March 24, 2000, to shareholders of record on March 10, 2000.
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 15,
1555 N. RiverCenter Drive 2000, 4:00 PM at the
Suite 301 Marriott 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>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Gross Premiums Written $ 86,002,801 $ 87,929,152 $ 99,507,846 $ 90,939,387 $ 70,878,492
Net Premiums Written $ 80,193,376 $ 82,775,973 $ 91,564,795 $ 89,243,325 $ 68,356,968
Premiums Earned $ 82,841,104 $ 88,629,476 $ 87,451,620 $ 77,347,319 $ 63,865,500
Net Investment Income 9,136,244 9,119,936 8,580,713 7,155,382 6,635,123
Realized Investment Gains 8,184,101 13,198,139 15,370,384 8,468,911 3,587,323
Other Revenues 249,672 113,005 36,801 382,130 144,866
Total Revenues 100,411,121 111,060,556 111,439,518 93,353,742 74,232,812
Losses and Loss Adjustment Expenses Incurred 45,300,841 52,377,114 61,128,402 41,165,776 34,099,463
Underwriting and Other Expenses 31,199,583 30,682,454 28,587,186 26,680,657 21,497,664
Total Losses Incurred and Expenses 76,500,424 83,059,568 89,715,588 67,846,433 55,597,127
Income from Operations Before Income Taxes 23,910,697 28,000,988 21,723,930 25,507,309 18,635,685
Income Tax Expense 7,198,234 8,577,075 6,532,051 7,158,151 4,705,279
Consolidated Net Income $ 16,712,463 $ 19,423,913 $ 15,191,879 $ 18,349,158 $ 13,930,406
Weighted Avg Number of Shares Outstanding-Basic 11,252,358 11,206,018 11,151,428 11,077,501 11,049,660
Weighted Avg Number of Shares Outstanding-Diluted 11,297,289 11,280,442 11,285,751 11,315,758 11,190,198
Income Per Share-Basic $ 1.49 $ 1.73 $ 1.36 $ 1.66 $ 1.26
Income Per Share-Diluted $ 1.48 $ 1.72 $ 1.35 $ 1.62 $ 1.24
Total Cash Dividends Per Share $ 0.28 $ 0.28 $ 0.38 $ 0.33 $ 0.24
Consolidated Net Income and Cash Dividends Stated
as a Ratio to Beginning Shareholders' Equity 14.1% 16.2% 16.7% 23.8% 25.3%
Year End Financial Position:
Assets $257,622,581 $277,359,597 $286,682,275 $228,885,454 $176,730,156
Shareholders' Equity 133,226,210 141,315,973 139,342,141 116,581,883 92,653,880
Book Value Per Share $ 11.82 $ 12.59 $ 12.46 $ 10.50 $ 8.37
Shares Outstanding 11,267,899 11,222,180 11,178,882 11,103,297 11,068,161
Insurance Operating Ratios (Statutory Basis):
Losses and Loss Adjustment Expenses to
Net Premiums Earned 54.9% 59.4% 70.1% 53.5% 53.2%
Underwriting Expenses to Net Premiums Written 37.0% 35.6% 32.1% 33.5% 32.8%
Combined Ratio 91.9% 95.0% 102.2% 87.0% 86.0%
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.
</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 pro-
perty-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 Company's niche market, has presented an unprecedented challenge to mange-
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, managment belives that the property-casualty in-
surance industry is in a downward cycle. However, despite a decrease in premium
writings, the Company saw a substantial increase in the profitability of its
core operations in 1999. Underwriting income increased to $6.3 million this year
compared to $5.6 million in 1998 and a loss of $2.3 million in 1997. The de-
crease in premiums written experienced over the past two years was due to a re-
underwriting of the Company's entire book of business. Management is confident
that the increased emphasis on prudent underwriting standards as well as aggres-
sive marketing will assure a continuation of the Company's history of substan-
tial underwriting profits and increasing shareholder value.
Gross premiums written during 1999 were $86,002,801, compared with $87,929,152
in 1998 and $99,507,846 in 1997.
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 1999 totaled $82,841,104, compared
with $88,629,476 and $87,451,620 in 1998 and 1997, respectively. The net unearn-
ed premium reserve was $39,454,257, $41,541,432 and $47,411,849 at each year
end.
<TABLE>
<CAPTION>
1999 1998 1997
<S>
Gross Premiums Written $86,002,801 $87,929,152 $99,507,846
Reinsurance Ceded 5,809,425 5,153,179 7,943,050
Net Premiums Written $80,193,376 $82,775,973 $91,564,796
Net Premiums Earned $82,841,104 $88,629,476 $87,451,620
Net Unearned Premium Reserve $39,454,257 $41,541,432 $47,411,849
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 stated as a ratio of net
premiums written. The combined ratios were as follows:
<CAPTION>
Insurance Operating Ratios (Statutory Basis): 1999 1998 1997
<S> <C> <C> <C>
Losses and Loss Adjustment Expenses 54.9% 59.4% 70.1%
Underwriting Expenses 37.0% 35.6% 32.1%
Combined Ratios 91.9% 95.0% 102.2%
The re-underwriting of the book of business has led to a sharp decline in the loss and loss adjustment expense ratio.
The increase in the underwriting expense ratio is due to a combination of increased marketing costs and a decrease in the
denominator of that ratio, which is net premiums written. The Company's combined ratio continues to compare very
favorably to the industry average, which was 107.6% for the first nine months of 1999.
</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 avail-
able-for-sale and are carried at fair value. The unrealized gains and losses,
net of tax, are reported as "Accumulated Other Comprehensive Income (Loss)" in
the equity portion of the balance sheet.
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: 1999 1998 1997
<S> <C> <C> <C>
Invested Assets $218,085,184 $238,140,592 $245,644,042
Net Investment Income 9,136,244 9,119,936 8,580,713
Percent of Return to
Average Carrying Value 4.2% 4.5% 4.9%
Realized Gains 8,184,101 13,198,139 15,370,384
Change in Unrealized Gains $(21,981,943) $(14,657,027) $ 16,746,287
The net unrealized loss of $21,981,943 for 1999 was comprised of a $2,378,798 unrealized loss on
fixed maturities and a $19,603,145 unrealized loss on the Company's equity portfolio. Management has begun
to increase its tax-free bond holdings and de-emphasize the equity portfolio, but is optimistic that the
recent downturn in the value of its equity investments is temporary and that the current market conditions
provide an even greater opportunity to invest and build shareholder value over the long term.
Net investment income in 1999 amounted to $9,136,244 compared with $9,119,936 and $8,580,713 in 1998
and 1997, respectively. The Company holds a larger percentage of equity investments than is typical for
the property-casualty industry, which leads to a comparatively low rate of return on invested assets.
</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 of 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 $77,256,192 as of December 31, 1999 compared to
$78,504,050 as of December 31, 1998. This decrease is a combination of giving
consideration for the decrease in premium volume as well as the more favorable
loss development trend experienced in 1999. Management continues to closely
monitor the reserves for losses and loss adjustment expenses to assure adequate
recognition of the ultimate liability for claims and claim expenses.
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 (84.7% in 1999, 85.9% in 1998 and 85.7% in
1997) 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 SEC as exposure to fluctuations in interest rates,
foreign currency exchange rates, and commodity or other price changes. The Com-
pany does not invest in derivatives or similar financial instrumenmts, which are
highly sensitive to market risk and which are the main focus of the new require-
ments. However, the requirements are broad enough in scope to encompass the po-
tential impact of interest rate fluctuations on the Company's fixed income port-
folio, as well as the potential impact of a severe drop in the stock market on
the Company's equity investments.
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 occur on Janury 1, 2000 and
remain in effect for the life of the fixed income portfolio.
<TABLE>
<CAPTION>
Basis Point Increase/(Decrease)
Current
Portfolio Characteristics (200) (100) Market Rate 100 200
<S> <C> <C> <C> <C> <C>
Market Value ($000's) $100,562 $ 94,821 $ 88,906 $ 83,230 $ 77,956
Market Value/Statement Value (%) 118.0% 111.2% 104.3% 97.6% 91.5%
Effective Duration (years) 4.9 5.3 5.6 5.8 6.0
The value of the Company's common stock portfolio is subject to equity price risk. If market prices were to
decrease 10%, the fair value of the common stock portfolio would decrease by an estimated $7.0 million,
from $116.7 million to $109.7 million.
The Company's investment portfolio is actively managed to minimize downward price risk.
</TABLE>
YEAR 2000
In prior years the Company discussed the nature and progress of its plans to be-
come year 2000 ready. In 1999 the Company completed its remediation and testing
of systems. As a result of the planning and implementation efforts, the Company
experienced no significant disruptions in mission critical information technolo-
gy and non-information technology systems and believes those systems successful-
ly responded to the year 2000 date change.
The Company expensed approximately $90,000 during 1999 in connection with re-
mediating its systems. The Company is not aware of any material problems result-
ing from year 2000 issues, either with our products, our internal systems or the
products and services of third parties. The Company will continue to monitor its
mission critical computer applications and those of its agents and vendors
throughout the year 2000 to ensure that any latent year 2000 matters that may
arise are addressed promptly.
SAFE HARBOR STATEMENT
Some of the statements in this report, as well as statements by the Company in
periodic press releases and oral statements made by the Company's officials to
analysts and shareholders in the course of presentations about the Company, con-
stitute "forward-looking statements" within the meaning of the Private Securi-
ties Litigation Reform Act of 1995. Such forward-looking statements involve
known and unknown risks, estimates subject to change in circumstances, uncer-
tainties and other factors that may cause the actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements of the Company expressed or implied by the forward-
looking statements.
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,
1999 and 1998.
(4) Consolidated statements of income - for each of
the three years in the period ended December
31, 1999.
(5) Consolidated statements of shareholders' in-
vestment and comprehensive income (loss) - for
each of the three years in the period ended
December 31, 1999.
(6) Consolidated statements of cash flows - for
each of the three years in the period ended
December 31, 1999.
(7) Notes to consolidated financial statements.
Item 9. Disagreements of Accounting and Financial Disclosures
None.
PART III
Item 10. Directors and Executive Officers of CTC
(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 (60) Vice President and Treasurer of Mr. Breitnauer has been associated with 2002
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.
Deforest, Wisconsin
George A. Fait (73) Chairman of the Board and Mr. Fait is a director of Bank One and 2000
1965 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 (58) Owner & President Mr. Burcalow has been Owner & President of 2001
1997 Yahara Materials, Inc. Yahara Materials, Inc. for over 30 years.
Waunakee, Wisconsin
Michael J. Larson (58) Principal Mr. Larson has been associated with the 2001
1991 Southwestern Financial Services banking industry in various capacities
Madison, Wisconsin since 1965.
Reinhart H. Postweiler(70)Retired, formerly with Flad Mr. Postweiler is a Director of Bank One. 2002
1977 Affiliated Corporation; Director He is a member of the Wisconsin Society of
of Bank One. Professional Engineers and the National
Society of Professional Engineers.
Kenneth P. Urso (65) Owner & Operator Mr. Urso has been in the insurance business 2000
1997 Urso & Associates, LLC 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 (73 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 (60 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 (71 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 (61 years of age) Virgiline M. Schulte (71 years
Elected in 1986. of age) Elected in 1993.
Vice President - Agency Vice President- Data Processing
Joel G. Fait (41 years of age) Frank S. Zillner (38 years of
Elected in 1993. age) Elected in 1993.
Vice President - Rating Corporate Counsel
Vacant Vacant
Vice President -P&C Underwriting Vice President- F&S Underwriting
Vacant Jess J. Wadle (60 years of age)
Elected in 1998.
(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 7, 2000 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 7, 2000 are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The sections captioned "Principal Shareholders", "Option Exercised in
Last Fiscal Year" and "Compensation Plans" in the CTC Proxy Statement
dated April 7, 2000 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 7, 2000, 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, 1999 and 1998.
Consolidated statements of income - for each of the three years
in the period ended December 31, 1999.
Consolidated statements of shareholders' investment and compre-
hensive income for each of the three years in the period ended
December 31, 1999.
Consolidated statements of cash flows - for each of the three
years in the period ended December 31, 1999.
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, 1999.
(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, 2000
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 disclosures 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, 1999 and 1998, 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, 1999. 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 auditing standards generally accept-
ed in the United States. 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 state-
ment 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, 1999 and 1998, and the consolidated re-
sults of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles gener-
ally accepted in the United States. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial state-
ments taken as a whole, present fairly in all material respects the information
set forth therein.
Milwaukee, Wisconsin Ernst & Young LLP
February 17, 2000
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Assets
Investments (Notes (1)(b) and (2)):
Available-for-sale investment securities, at fair value
Fixed maturities (amortized cost $80,019,257 and $68,210,546 respectively) $ 83,210,487 $ 75,061,460
Equity securities:
Common stock, (cost $125,913,872 and $115,583,088, respectively) 116,656,582 135,373,036
Nonredeemable preferred stock, (cost $5,725,500 and
$6,769,703, respectively) 5,695,567 7,851,215
Investment real estate, at cost, net of depreciation 10,540,426 9,999,919
Short-term investments, at cost which approximate fair value (Note(2)(d) 1,982,122 9,854,962
Total Investments 218,085,184 238,140,592
Cash 1,08,0435 1,544,438
Accrued investment income 1,927,901 1,678,998
Receivables from agents, insureds and others, less allowance
for doubtful accounts of $530,000 and $500,000, respectively 14,892,647 17,217,646
Balances due from reinsurers 71,755 913,186
Funds held by ceding reinsurers 40,000 35,756
Income taxes recoverable- current 686,240 141,982
Deferred income taxes 4,153,393 -
Deferred insurance acquisition costs (Note (1)(e)) 12,644,189 13,524,777
Prepaid reinsurance premiums 1,287,627 727,074
Due from securities brokers 639,136 1,633,833
Other assets 2,114,074 1,801,315
Total Assets $257,622,581 $277,359,597
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<CAPTION>
1999 1998
Liabilities
<S> <C> <C>
Policy Liabilities and Accruals (Notes (1)(d), (3) and (4)):
Reserve for losses $ 53,575,780 $ 55,336,376
Reserve for loss adjustment expenses 23,680,412 23,167,674
Unearned premiums 39,454,257 41,541,432
Total Policy Liabilities and Accruals 116,710,449 120,045,482
Accounts payable 3,950,898 3,340,980
Claim drafts outstanding 1,854,701 2,836,566
Due to securities brokers - 231,185
Balances due to reinsurers 1,541,460 1,038,967
Accrued premium taxes 338,863 237,171
State income taxes payable - 91,444
Deferred income taxes (Notes (1)(f) and (5)) - 8,221,829
Total Other Liabilities 7,685,922 15,998,142
Total Liabilities 124,396,371 136,043,624
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 11,538,970 and 11,529,376, respectively 11,538,970 11,529,376
Paid-in surplus 22,594,538 22,246,366
Accumulated other comprehensive (loss) income, net of deferred taxes of
of ($2,133,595) and $9,702,829, respectively(Notes(1)(b) & (2)) (3,962,398) 18,019,545
Retained earnings 103,577,193 90,016,245
Shareholders' investment before treasury stock 133,748,303 141,811,532
Treasury stock, 271,071 and 307,196 shares, respectively, at cost (522,093) (495,559)
Total Shareholders' Investment 133,226,210 141,315,973
Total Liabilities and Shareholders' Investment $257,622,581 $277,359,597
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, 1999, 1998 and 1997
1999 1998 1997
<S> <C> <C> <C>
Revenues:
Premiums earned (Note (1)(c)) $ 82,841,104 $ 88,629,476 $ 87,451,620
Net investment income (Note (2)(e)) 9,136,244 9,119,936 8,580,713
Realized investment gains (Notes (1)(b) and (2)) 8,184,101 13,198,139 15,370,384
Other revenues 249,672 113,005 36,801
Total Revenues 100,411,121 111,060,556 111,439,518
Losses and Expenses Incurred (Notes (1)(d), (3) and (4)):
Losses incurred 34,407,096 43,994,221 49,055,296
Loss adjustment expenses incurred 10,893,745 8,382,893 12,073,106
Underwriting, acquisition and insurance expenses (Note(10)) 28,920,512 28,558,650 28,458,021
Decrease (Increase) in deferred insurance acquisition costs 880,588 662,164 (1,208,627)
Other expenses 1,398,483 1,461,640 1,337,792
Total Losses and Expenses Incurred 76,500,424 83,059,568 89,715,588
Income from operations before income taxes 23,910,697 28,000,988 21,723,930
Income tax expense (Note (5)) 7,198,234 8,577,075 6,532,051
Net Income $ 16,712,463 $ 19,423,913 $ 15,191,879
Income Per Share - basic (Note (1)(g)) $ 1.49 $ 1.73 $ 1.36
Weighted average number of shares outstanding-basic
(Note (1)(g)) 11,252,358 11,206,018 11,151,428
Income Per Share - diluted (Note (1)(g)) $ 1.48 $ 1.72 $ 1.35
Weighted average number of shares outstanding-diluted
(Note (1)(g)) 11,297,289 11,280,442 11,285,751
The accompanying notes to the consolidated financial statements are an integral part of these financial statements.
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
For the Years Ended December 31, 1997, 1998 and 1999
Common
Common Stock Accumulated
Stock Distributable Other
(Par Value) (Par Value Paid-In Comprehensive Comprehensive Retained Treasury
$1.00) $1.00) Surplus Income (Loss) Income (Loss) 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 loss
Unrealized depreciation on
available-for-sale securities,
net of deferred taxes - - - (6,078,237) - - -
Less: reclassification adjust-
ment, net of tax of $4,619,349,
for gain included in net income - - - (8,578,790) - - -
Other comprehensive loss - - - (14,657,027) (14,657,027) - -
Comprehensive income - - - 4,766,886 - - -
Stock options exercised 26,856 - 142,409 - - - (18,952)
Purchases and sales of treasury
stock, net - - 271,751 - - - (75,332)
Cash dividends declared - - - - - (3,139,786) -
Balance, December 31, 1998 11,529,376 - 22,246,366 - 18,019,545 90,016,245 (495,559)
Comprehensive income (loss)
Net income - - - 16,712,463 - 16,712,463 -
Other comprehensive loss
Unrealized depreciation on
available-for-sale securities,
net of deferred taxes - - - (16,662,277) - - -
Less: reclassification adjust-
ment, net of tax of $2,864,435,
for gain included in net income - - - (5,319,666) - - -
Other comprehensive loss - - - (21,981,943) (21,981,943) - -
Comprehensive loss - - - (5,269,480) - - -
Stock options exercised 9,594 - 57,748 - - - (26,534)
Purchases and sales of treasury
stock, net - - 290,424 - - - -
Cash dividends declared - - - - - (3,151,515) -
Balance, December 31, 1999 $11,538,970 $ - $22,594,538 $ - $(3,962,398) $103,577,193 $ (522,093)
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, 1999,1998 and 1997
1999 1998 1997
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net Income $ 16,712,463 $ 19,423,913 $ 15,191,879
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,161,702 1,195,955 1,018,894
Realized investment gains (8,184,101) (13,198,139) (15,370,384)
Change in:
Deferred insurance acquisition costs 880,588 662,164 (1,208,627)
Unearned premiums (2,087,175) (5,870,417) 4,153,016
Allowance for doubtful accounts receivable from agents 30,000 60,000 60,000
Accrued investment income (248,903) 28,694 (22,752)
Receivables from agents, insureds and others 2,294,999 3,542,835 (2,168,094)
Balances due to/from reinsurers 317,498 (191,361) (284,774)
Reinsurance recoverable on paid and unpaid losses 1,026,426 (897,506) 755,956
Funds held by ceding reinsurers (4,244) (35,756) 44,791
Income taxes payable/recoverable (635,702) 633,804 (2,554,594)
Deferred income taxes (538,796) (304,896) (78,292)
Due to/from securities brokers 763,512 (6,721,020) 11,191,845
Prepaid reinsurance premiums (560,553) 16,914 (39,840)
Other assets (332,788) (5,305) 339,684
Reserves for losses and loss adjustment expenses (1,247,858) 7,031,712 23,769,975
Accounts payable (371,947) 371,977 (806,814)
Accrued premium taxes 101,692 (99,992) (225,410)
Net cash provided by operating activities 9,076,813 5,643,576 33,766,459
Cash flows provided by (used for) investing activities:
Proceeds from sales of available-for-sale investments 29,718,246 40,484,195 44,747,214
Purchases of available-for-sale investments (44,377,254) (49,573,482) (78,773,489)
Maturities of available-for-sale investments 8,690,009 7,660,719 5,064,056
Purchases of depreciable assets (751,534) (1,080,065) (477,992)
Net cash used for investing activities (6,720,533) (2,508,633) (29,440,211)
Cash flows provided by (used for) financing activities:
Cash dividends paid (3,151,515) (3,139,786) (4,226,165)
Stock options exercised 40,808 441,017 626,022
Net proceeds from sale (purchase) of treasury stock 290,424 (94,284) 111,449
Net cash used for financing activities (2,820,283) (2,793,053) (3,488,694)
Net (decrease) increase in cash (464,003) 341,890 837,554
Cash, beginning of year 1,544,438 1,202,548 364,994
Cash, end of year $ 1,080,435 $ 1,544,438 $ 1,202,548
Cash paid during the year for:
Income taxes $ 8,611,726 $ 8,358,132 $ 9,164,506
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
accounting principles generally accepted in the United States. 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 $1,173,643 and $789,597 as of December 31, 1999 and December
31, 1998, respectively. The real estate is depreciated over the
estimated useful life of the asset.
Cost of investments sold is determined under the specific identifica-
tion method.
(c) Premiums
Premiums are recognized as revenue on a pro rata basis over the term
of the contracts. Approximately 19% 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 recoverables, 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 pay-
ments are reflected in expense for the period in which the estimates
are changed.
(e) Deferred Insurance Acquisition Costs
Deferred 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
Basis income per share is computed by dividing net income by the
weighted average number of shares of stock outstanding during the
year. Diluted income per share is computed by dividing net income
by the weighted-average number of shares of common stock and common
stock equivalents from options outstanding. The following table sets
forth the computations of basis and diluted EPS:
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
<S> <C> <C> <C>
Numerator:
Consolidated net income $16,712,463 $19,423,913 $15,191,879
Denominator:
Demoninator for basic EPS
-weighted average shares 11,252,358 11,206,018 11,151,428
Effect of dilutive securities
-employee stock options 44,931 74,424 134,323
Denominator for diluted EPS 11,297,289 11,280,442 11,285,751
Basic EPS $1.49 $1.73 $1.36
Diluted EPS $1.48 $1.72 $1.35
</TABLE>
(h) Comprehensive Income
Comprehensive income (loss) is defined as net income plus or minus
other comprehensive income (loss), which for the Company, under
existing accounting standards, includes unrealized gains and losses,
net of income tax effects, on certain investments in debt and equity
securities. Comprehensive income (loss) is reported by the Company
in the consolidated statements of shareholders' investment and
comprehensive income (loss).
(2)Investments
(a) The amortized cost and estimated fair value of fixed maturities and
equity securities are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Type of investment Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1999
Fixed maturities:
U.S. Government bonds $ 39,428 $ 2,196 $ - $ 41,624
State, municipal and political
subdivision bonds 78,855,846 4,423,576 (1,204,274) 82,075,148
Corporate bonds and notes 1,123,983 - (30,268) 1,093,715
Total fixed maturities $ 80,019,257 $ 4,425,772 $ (1,234,542) $ 83,210,487
Equity securities:
Common stock $125,913,872 $16,310,888 $(25,568,178) $116,656,582
Non-redeemable preferred stock 5,725,500 552,975 (582,908) 5,695,567
Total equity securities $131,639,372 $16,863,863 $(26,151,086) $122,352,149
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
(b) The amortized cost and estimated fair value of fixed maturities at December 31, 1999, 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 $ 0 $ 0
Due after one year through five years 2,581,698 2,675,917
Due after five years through ten years 7,763,711 8,154,220
Due after ten years 69,673,848 72,380,350
Total $80,019,257 $83,210,487
(c) Realized gains (losses) and change in unrealized gains (losses) for the three years ended December 31, 1999,
1998 and 1997, are as follows:
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Realized gains (losses):
Fixed maturities
Gross gains $ 66,054 $ 64,575 $ 53,584
Gross losses (6,386) (5,040) (7,250)
Equity securities
Gross gains 8,174,659 13,138,613 15,323,242
Gross losses (50,226) (9) -
Other - - 808
Net realized gains $8,184,101 $13,198,139 $15,370,384
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Change in unrealized gains (losses):
Fixed maturities $ (3,659,687) $ 2,214,372 $ (123,135)
Equity securities (30,158,682) (24,001,959) 16,869,422
Net change in unrealized gains (33,818,369) (21,787,587) 16,746,287
Less effect of applicable deferred taxes (11,836,426) 7,130,560 5,693,740
Net (decrease) increase in unrealized gains $(21,981,943) $(14,657,027) 11,052,547
Following is a summary of total unrealized gains (losses) as of December 31, 1999, 1998 and 1997:
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Unrealized gains (losses):
Fixed maturities
Gross unrealized gains $ 4,425,772 $ 6,860,733 $ 4,644,841
Gross unrealized losses (1,234,542) (9,819) (8,299)
Equity securities
Gross unrealized gains 16,863,863 32,173,006 47,293,990
Gross unrealized losses (26,151,086) (11,301,546) (2,420,571)
Gross unrealized (losses) gains (6,095,993) 27,722,374 49,509,961
Less effect of applicable deferred taxes (2,133,595) 9,702,829 16,833,389
Net unrealized (losses) gains $ (3,962,398) $ 18,019,545 $ 32,676,572
</TABLE>
(d) The amortized cost of securities on deposit with insurance regulators
in accordance with statutory requirements was $3,670,000 at both
December 31, 1999 and 1998.
In connection with the reinsurance assumed operations, CIC has
established a security trust fund agreement with a bank, consisting
of cash and securities in the amount of $865,000 at December 31, 1999
and $835,000 at December 31, 1998.
(e) Following is a summary of investment income from each category of
investments:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Fixed maturities $ 4,732,097 $ 4,619,471 $ 4,800,978
Equity securities 3,917,943 3,907,213 3,292,615
Investment real estate 2,458,961 2,383,255 2,340,878
Short-term 252,387 186,341 149,879
Total investment income 11,361,388 11,096,280 10,584,350
Investment expenses - real estate 1,434,580 1,310,113 1,361,092
Other investment expenses 406,518 321,016 401,994
Depreciation on real estate 384,046 345,215 240,551
Net investment income $ 9,136,244 $ 9,119,936 $ 8,580,713
</TABLE)
(f) The Company had investments in state, municipal and political subdivi-
sion bonds with amortized cost of $78,855,846 and $67,339,664 at
December 31, 1999 and 1998, respectively. Approximately 92% of these
bonds were special assessment revenue bonds and approximately 8% of
these bonds were special were state and political subdivision
obligations at December 31, 1999 and 1998. The Company monitors its
exposure by investing its funds in accordance with guidelines set by
the Company's investment committee. At December 31, 1999, approximately
42% of the municipal bond portfolio consisted of securities of Wisconsin
and Minnesota. 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>
1999 1998 1997
<S> <C> <C> <C>
Balance as of January 1, $78,504,050 $71,472,338 $47,702,363
Reinsurance balances (1,101,770) (594) 225,367
Net reserves 77,402,280 71,471,744 47,927,730
Incurred losses and loss adjustment expenses related to:
Current year 47,749,455 49,862,090 43,042,827
Prior years
Direct losses (net of ceded) (562,627) 4,091,923 10,725,730
Direct loss adjustment expenses (net of ceded) (2,379,899) (1,956,631) 2,141,661
Discontinued assumed reinsurance 493,912 379,732 5,218,184
Total prior years (2,448,614) 2,515,024 18,085,575
Total incurred 45,300,841 52,377,114 61,128,402
Paid losses and loss adjustment expenses related to:
Current year 18,642,962 20,035,517 16,327,601
Prior years 26,682,489 26,370,166 21,160,666
Total paid 45,325,451 46,405,683 37,488,267
Other adjustments, net - (40,895) (96,121)
Net balance at December 31, 77,377,670 77,402,280 71,471,744
Reinsurance balances (121,478) 1,101,770 594
Balance at December 31, $77,256,192 $78,504,050 $71,472,338
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 1999, 1998 and 1997. 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
development on all lines of business, a substantial increase in incurred but not reported (IBNR) reserves was necessary.
The Company increased IBNR reserves by $10.0 million on direct business and $4.5 million on assumed reinsurance that year.
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, its is reasonably possible these estimates, net of estimated
reinsurance recoverables, may increase in the future. See Note 4(b) for discussion of assumed reinsurance.
</TABLE>
(4) Reinsurance
(a)Ceded
From 1996 through 1999, 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 ob-
ligations assumed under the reinsurance agreements. To minimize its ex-
posure to significant losses from insurer insolvencies, the Company eval-
uates the financial condition of its reinsurers. Amounts recoverable from
reinsurers are estimated in a manner consistent with the claim liability
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 reinsurance 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 co-
ver certain risks which have had significant development industry-wide
over the past serveral 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 $8,969,409 at December 31, 1999 are adequate,
but recognizes the uncertainty industry-wide concerning these esposures.
The Company has provided letters of credit relating to reinsurance
assumed of $130,000 at both December 31, 1999 and 1998.
(c)Assumed-Active
The Company participates in a reinsurance program whereby CIC assumes and
then fully cedes certain accident and health exposures, retaining a brok-
erage fee. Management believes the Company is not likely to incur a loss
on this business.
Net written and earned premiums and losses and loss adjustment expenses
included reinsurance activity as follows:
<TABLE>
<CAPTION>
Written Premiums
1999 1998 1997
<S> <C> <C> <C>
Direct $84,460,081 $86,329,672 $94,690,638
Assumed 1,542,719 1,599,480 4,817,208
Ceded (5,809,424) (5,153,179) (7,943,050)
Net premiums written $80,193,376 $82,775,973 $91,564,796
Earned Premiums
1999 1998 1997
Direct $86,565,885 $92,203,082 $90,537,623
Assumed 1,524,090 1,596,487 4,817,208
Ceded (5,248,871) (5,170,093) (7,903,211)
Net premiums earned $82,841,104 $88,629,476 $87,451,620
Losses and Loss Adjustment Expenses
1999 1998 1997
Direct $47,738,063 $53,447,519 $57,314,915
Assumed - losses 1,253,237 280,900 5,162,726
Assumed - legal and audit 17,084 98,832 55,458
Ceded (3,707,543) (1,450,137) (1,404,697)
Net losses and loss adjustment expenses $45,300,841 $52,377,114 $61,128,402
</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 1999, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current expense:
Federal $ 7,115,401 $ 8,096,181 $ 6,055,422
State 621,630 785,787 554,922
Total current expense 7,737,031 8,881,968 6,610,344
Deferred expense(benefit):
Deferred insurance acquisition costs (308,206) (231,757) 410,933
Unearned premiums 185,341 409,745 (279,696)
Discount on loss and loss adjustment expense reserves (69,897) (322,034) (582,307)
Unpaid commissions (333,362) (140,748) 400,699
Other, net (12,673) (20,099) (27,922)
Total deferred benefit (538,797) (304,893) (78,293)
Income tax expense $ 7,198,234 $ 8,577,075 $ 6,532,051
(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>
1999 1998 1997
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
Municipal bond income, net of proration (5.9%) (4.9%) (6.5%)
Dividend received exemption, net of proration (1.8%) (1.7%) (2.0%)
State income tax expense, net of federal tax benefit 1.7% 1.7% 1.7%
Other, net 1.1% 0.5% 1.9%
Effective income tax rate 30.1% 30.6% 30.1%
(d)Significant components of the deferred tax liabilities and assets are as follows:
<CAPTION>
December 31, December 31,
1999 1998
<S> <C> <C>
Deferred tax liabilities:
Deferred insurance acquisition costs $ 4,425,466 $ 4,733,672
Net unrealized gains on investment securities - 9,737,421
Other, net 79,339 81,512
Total deferred tax liabilities 4,504,805 14,552,605
Deferred tax assets:
Unearned premium reserve discounting 2,671,664 2,857,005
Loss and loss adjustment expense reserve discounting 2,641,574 2,571,677
Net unrealized losses on investment securities 2,133,595 -
Unpaid commissions 839,670 506,308
Other, net 371,695 395,786
Total deferred tax assets 8,658,198 6,330,776
Net deferred tax asset (liability) $ 4,153,393 $(8,221,829)
</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 Inter-
pretations in accounting for its stock options. Under APB 25, since the ex-
ercise price of the Company's stock options equals the market price of the
underlying stock on the date of the grant, no compensation expense is recog-
nized.
Had the Company elected to follow the fair value method under FASB 123, "Ac-
counting for Stock-Based Compensation", net income and earnings per share
would not be materially different for the years 1999, 1998 and 1997. 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 of these
options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1999, 1998
and 1997, respectively: risk-free interest rates of 6.1%, 4.4% and 6.3%;
dividend yields of 2.0%, 1.4% and 1.2%; volatility factors of the expected
market price for the Company's common stock of .394, .345 and .256; and a
weighted-average expected life of the options of 2.5 years. The weighted-
average fair value of options granted for the years 1999,1998 and 1997 was
$2.29, $3.92 and $5.20, respectively. The estimated fair value is amortized
to expense over the options' vesting period. The Company's pro forma infor-
mation follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Pro forma net income $16,538,296 $19,156,540 $14,871,823
Pro forma earnings per share
Basic $1.47 $1.71 $1.33
Diluted $1.46 $1.70 $1.32
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 697,115 shares at December 31, 1999.
A summary of the Company's stock option activity, and related information for the years ended December 31 follows:
<CAPTION>
1999 1998 1997
Weighted-Avg. Weighted-Avg. Weighted-Avg.
Options Exercise Price Options Exercise Price Options Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding, be-
ginning of year 280,924 $ 13.38 237,111 $ 11.80 327,123 $ 10.30
Granted 236,704 10.19 97,900 15.75 5,700 22.44
Exercised (9,594) 7.02 (26,856) 6.30 (83,678) 7.48
Forfeited (227,489) 14.58 (27,231) 15.15 (12,034) 10.06
Outstanding, end
of year 280,545 $ 9.93 280,924 $ 13.38 237,111 $ 11.80
Options exercisable at December 31, 1999 were 49,166. The weighted-average remaining exercise period for
all outstanding options as of December 31, 1999 was 4.3 years. Exercise prices for options outstanding as
of December 31, 1999 ranged from $3.87 to $10.66 with 12%, 41% and 43% having exercise prices of $9.24,
$9.69 and $10.66, respectively.
</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,
1999 1998 1997
<S> <C> <C> <C>
Capitol Indemnity Corporation $91,570,236 $102,902,836 $109,324,111
Capitol Specialty Insurance Corporation 4,865,494 5,865,245 6,437,879
Total $96,435,730 $108,768,081 $115,761,990
<CAPTION>
Net Income for the Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Capitol Indemnity Corporation $16,306,022 $19,051,239 $13,162,055
Capitol Specialty Insurance Corporation 689,133 479,019 297,036
Total $16,995,155 $19,530,258 $13,459,091
</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, 1999, the amount of compulsory surplus required to be
maintained by CIC was approximately $19,957,576.
(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 $242,511, $214,839 and $192,738 in 1999,
1998 and 1997, 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 $178,694,
$100,000 and $100,103 in 1999, 1998 and 1997, respectively.
(10)Underwriting, Acquisition and Insurance Expenses
A summary of underwriting, acquisition costs and insurance expenses incur-
red during the years ended December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net commissions $18,001,338 $18,459,299 $19,066,258
Salaries and other compensation 4,944,476 4,710,297 4,163,019
Other 5,974,697 5,389,054 5,228,744
Total costs 28,920,511 28,558,650 28,458,021
Decrease (Increase) in deferred insurance
acquisition costs 880,588 662,164 (1,208,627)
Total underwriting, acquisition and insurance expenses $29,801,099 $29,220,814 $27,249,394
Included in net commission is the fair value of CTC stock purchased by CIC and issued to agents as part of a contingent
commission agreement. The amounts expensed were $478,880, $468,858 and $619,264 for the years 1999, 1998 and 1997, re-
spectively.
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 $28,325,677, $27,833,262
and $26,141,226 in 1999, 1998 and 1997, respectively.
</TABLE>
(11)Line of Credit
The Company has a line of credit of $10,000,000. There were no significant
borrowings during 1999, and none were outstanding as of December 31, 1999.
(12)Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1999
First Second Third Fourth Total
<S> <C> <C> <C> <C> <C>
Revenues $25,089,802 $26,254,623 $25,857,210 $23,209,486 $100,411,121
Losses incurred and expenses 18,550,741 16,380,003 21,460,886 20,108,794 76,500,424
Net income 4,525,052 6,732,395 3,107,433 2,347,583 16,712,463
Net income per share- basic $ 0.40 $ 0.60 $ 0.28 $ 0.21 $ 1.49
Net income per share- diluted $ 0.39 $ 0.60 $ 0.28 $ 0.21 $ 1.48
Dividends per share $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.28
For the Year Ended December 31, 1998
First Second Third Fourth Total
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
</TABLE>
(13)Industry Segment Disclosures
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Standards No. 131, "Disclosures a-
bout Segments of an Enterprise and Related Information". SFAS No. 131 super-
cedes SFAS No. 14, "Financial Reporting for Segments of a Business Enter-
prise". SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in published finan-
cial reports. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. 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 contrac-
tor's payment and performance bonds, license/permit bonds, fiduciary and ju-
dicial 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 1997 through 1999 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Revenue, excluding net investment
income and realized investment gains:
Property and Casualty $ 63,918,736 $ 65,678,284 $ 61,953,576
Fidelity and Surety 18,908,835 22,948,025 25,498,044
Reinsurance Assumed 13,533 3,167 -
Totals: $ 82,841,104 $ 88,629,476 $ 87,451,620
Losses and loss adjustment expenses:
Property and Casualty $ 31,734,367 $ 40,400,269 $ 42,598,229
Fidelity and Surety 13,233,814 11,818,682 13,531,066
Reinsurance Assumed 493,912 379,732 5,218,184
Totals: $ 45,462,093 $ 52,598,683 $ 61,347,479
Reconciliation to Consolidated GAAP:
Inter-company adjustments (161,252) (221,569) (219,077)
Consolidated GAAP $ 45,300,841 $ 52,377,114 $ 61,128,402
Other underwriting expenses:
Property and Casualty $ 20,509,441 $ 20,226,965 $ 18,872,812
Fidelity and Surety 9,194,086 9,239,049 10,524,643
Reinsurance Assumed (58,626) 34,509 (2,825)
Totals: $ 29,644,901 $ 29,500,523 $ 29,394,630
Reconciliation to Consolidated GAAP:
Decrease (increase) in D.I.A.C. 880,588 662,164 (1,208,627)
Inter-company adjustments 674,094 519,767 401,183
Consolidated GAAP $ 31,199,583 $ 30,682,454 $ 28,587,186
Net investment gain and other income:
Property and Casualty $ 5,264,383 $ 6,742,389 $ 7,106,636
Fidelity and Surety 678,678 692,572 727,037
Reinsurance Assumed 714,362 821,247 824,387
Totals: $ 6,657,423 $ 8,256,208 $ 8,658,060
Reconciliation to Consolidated GAAP:
Capital and surplus 10,417,802 13,419,217 14,465,107
Inter-company adjustments 494,792 755,655 864,731
Consolidated GAAP $ 17,570,017 $ 22,431,080 $ 23,987,898
Income tax expense (benefit)
Property and Casualty $ 5,356,364 $ 3,652,050 $ 2,552,145
Fidelity and Surety (1,151,955) 803,964 630,081
Reinsurance Assumed 70,582 128,293 (1,432,002)
Totals: $ 4,274,991 $ 4,584,307 $ 1,750,224
Reconciliation to Consolidated GAAP:
Capital and surplus 2,923,243 4,091,130 4,623,364
GAAP & inter-company adjustments - (98,362) 158,463
Consolidated GAAP $ 7,198,234 $ 8,577,075 $ 6,532,051
Net income (loss):
Property and Casualty $ 11,582,947 $ 8,141,389 $ 5,037,026
Fidelity and Surety (1,688,432) 1,778,902 1,539,291
Reinsurance Assumed 222,027 281,880 (2,958,970)
Totals: $ 10,116,542 $ 10,202,171 $ 3,617,347
Reconciliation to Consolidated GAAP: 6,595,921 9,221,742 11,574,532
Consolidated GAAP $ 16,712,463 $ 19,423,913 $ 15,191,879
Assets:
Property and Casualty $ 90,756,970 $105,614,860 $114,384,689
Fidelity and Surety 24,936,678 20,432,187 22,128,793
Reinsurance Assumed 8,702,723 9,996,577 10,826,652
Totals: $124,396,371 $136,043,624 $147,340,134
Reconciliation to Consolidated GAAP:
Capital and surplus 133,226,210 141,315,973 139,342,141
Consolidated GAAP $257,622,581 $277,359,597 $286,682,275
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 inter-segment transactions.
SCHEDULE I
CAPITOL TRANSAMERICA CORPORATION
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 1999
<CAPTION>
Amount at
Which Shown
Fair in Balance
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 $ 39,428 $ 41,624 $ 41,624
State, municipalities, and political subdivisions 78,855,846 82,075,148 82,075,148
All other corporate bonds 1,123,983 1,093,715 1,093,715
Total 80,019,257 83,210,487 83,210,487
Equity securities, available-for-sale:
Common stocks:
Public utilities 2,065,853 1,997,369 1,997,369
Banks, trusts, and insurance companies 71,143,680 63,987,942 63,987,942
Industrial, miscellaneous, and all other 52,704,339 50,671,271 50,671,271
Nonredeemable preferred stocks 5,725,500 5,695,567 5,695,567
Total 131,639,372 122,352,149 122,352,149
Real estate, net of depreciation 10,540,426 10,540,426 10,540,426
Short-term investments 1,982,122 1,982,122 1,982,122
Total Investments $224,181,177 $218,085,184 $218,085,184
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CAPITOL TRANSAMERICA CORPORATION
(Parent Company)
<CAPTION>
CONDENSED BALANCE SHEETS December 31,
Assets 1999 1998
<S> <C> <C>
Investments $ 7,046,418 $ 10,749,331
Cash 13,908 3,171
Accrued investment income 47,730 60,454
Investment in subsidiaries 124,363,795 129,393,891
Income taxes recoverable 169,680 -
Other assets 1,619,474 1,651,444
Total assets $133,261,005 $141,858,291
Liabilities and shareholders' investment
Liabilities:
Accounts payable $ 30,795 $ 33,933
Payable to affiliates 4,000 -
Income taxes payable - 18,338
Deferred income taxes - 490,047
Total liabilities 34,795 542,318
Shareholders' investment:
Common stock 11,538,970 11,529,376
Additional paid-in-capital 21,857,143 21,799,397
Accumulated other comprehensive (loss) income,
net of deferred taxes (37,235) 910,087
Retained earnings (including undistributed earnings of
subsidiaries of $123,866,985 and $102,271,184, respectively) 100,389,425 107,572,672
133,748,303 141,811,532
Less treasury stock, at cost (522,093) (495,559)
Total shareholders' equity 133,226,210 141,315,973
Total liabilities and shareholders' equity $133,261,005 $141,858,291
December 31,
STATEMENTS OF INCOME 1999 1998 1997
<S> <C> <C> <C>
Dividends received from subsidiaries $ 500,000 $ 5,000,000 $ 4,500,000
Management fees received from subsidiaries 906,737 2,031,293 1,768,789
Investment income 306,874 350,901 270,678
Realized investment gains 966,943 13 236,914
Other income 4,052 7,100 14,577
Total Income 2,684,606 7,389,307 6,790,958
Administrative expenses 1,504,083 1,495,240 1,371,392
Net income before tax and equity in undistributed
net income of subsidiaries 1,180,523 5,894,067 5,419,566
Income tax expense 166,487 346,794 238,511
Net income before equity in undistributed
net income of subsidiaries 1,014,036 5,547,273 5,181,055
Equity in undistributed net income of
subsidiaries, net of dividends paid 15,698,427 13,876,640 10,010,824
Net Income $16,712,463 $19,423,913 $15,191,879
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 1999 1998 1997
<S> <C> <C> <C>
Cash flows provided by operating activities:
Net income $16,712,463 $19,423,913 $15,191,879
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 777,657 850,739 778,343
Realized investment gains (966,943) (13) (236,914)
Change in:
Equity in net income of subsidiaries (15,698,427) (13,876,640) (10,010,824)
Other assets (131,113) (21,410) 671,601
Other liabilities (17,476) 6,093 (412,478)
Net cash provided by operating activitities 676,161 6,382,682 5,981,607
Cash flows provided by (used for) investing activities:
Proceeds from investments sold/matured 3,559,461 70,022 471,238
Purchases of investments (347,971) (2,367,149) (2,276,930)
Purchase of depreciable assets (751,534) (1,079,278) (477,992)
Net cash provided by (used for) investing activitities 2,459,956 (3,376,405) (2,283,684)
Cash flows provided by (used for) financing activities:
Cash dividends paid (3,166,188) (3,163,880) (4,281,405)
Stock options exercised 67,342 169,265 626,022
Net proceeds from (purchase) sale of treasury stock (26,534) (18,952) (63,769)
Net cash used for financing activitities (3,125,380) (3,013,567) (3,719,152)
Net increase (decrease) in cash 10,737 (7,290) (21,229)
Cash, beginning of year 3,171 10,461 31,690
Cash, end of year $ 13,098 $ 3,171 $ 10,461
Cash paid during the year for:
Income taxes $ 337,110 $ 333,917 $ 175,400
Interest - 4,190 -
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 Policyholder
Segment Costs Loss Expense Premiums Funds
<S> <C> <C> <C> <C>
1999:
Property-casualty
insurance $12,644,189 $77,256,192 $39,454,257 $ -
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 $ -
<CAPTION>
Year ended December 31
Benefits, Amortization of
Net Claims, Losses, Deferred Policy Other
Premium Investment and Settlement Acquisition Operating Premiums
Segment Revenue Income Expenses Costs Expenses Written
<S> <C> <C> <C> <C> <C> <C>
1999:
Property-casualty
insurance $82,841,104 $ 9,136,244 $45,300,841 $28,325,677 $ 1,398,483 $86,002,801
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
SCHEDULE IV
CAPITOL TRANSAMERICA CORPORATION
REINSURANCE
For The Years Ended December 31, l999, l998 and l997
<CAPTION>
Assumed Percentage
Direct 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, 1999
Premiums Written:
Accident and Health insurance $ 289,728 $ 1,493,857 $1,493,857 $ - $ 289,728 515.6%
Property & casualty and
fidelity & surety insurance 84,170,353 $ 4,315,567 $ 48,862 $ - $79,903,648 0.1%
Total premiums written $84,460,081 $ 5,809,424 $1,542,719 $ 0 $80,193,376 1.9%
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 1763.9%
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%
SCHEDULE VI
CAPITOL TRANSAMERICA CORPORATION
SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
December 31, l999
<CAPTION>
As of December 31,
BALANCE SHEET DATA: 1999 1998
<S> <C> <C>
Deferred insurance acquisition costs $12,644,189 $13,524,777
Outstanding loss and loss adjustment expense reserves 77,256,192 78,504,050
Discount deducted from reserves - -
Unearned premiums $39,454,257 $41,541,432
<CAPTION>
INCOME STATEMENT DATA: Year Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Earned premiums $82,841,104 $88,629,476 $87,451,620
Net investment income 9,136,244 9,119,936 8,580,713
Incurred losses and loss adjustment
expenses related to:
Current year 47,749,455 49,862,090 43,042,827
Prior years (2,448,614) 2,515,024 18,085,575
Amortization of deferred policy
acquisition costs 28,325,677 27,833,262 26,141,226
Paid claims and claim adjustment
expenses 45,325,451 46,405,683 37,488,267
Gross premiums written $86,002,801 $87,929,152 $99,507,846
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 83210487
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 122352149
<MORTGAGE> 0
<REAL-ESTATE> 10540426
<TOTAL-INVEST> 218085184
<CASH> 1080435
<RECOVER-REINSURE> 71755
<DEFERRED-ACQUISITION> 12644189
<TOTAL-ASSETS> 257622581
<POLICY-LOSSES> 77256192
<UNEARNED-PREMIUMS> 39454257
<POLICY-OTHER> 12904440
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 11538970
0
0
<OTHER-SE> 121687240
<TOTAL-LIABILITY-AND-EQUITY> 257622581
82841104
<INVESTMENT-INCOME> 9136244
<INVESTMENT-GAINS> 8184101
<OTHER-INCOME> 249672
<BENEFITS> 45300841
<UNDERWRITING-AMORTIZATION> 880588
<UNDERWRITING-OTHER> 28920512
<INCOME-PRETAX> 23910697
<INCOME-TAX> 7198234
<INCOME-CONTINUING> 16712463
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16712463
<EPS-BASIC> 1.49
<EPS-DILUTED> 1.48
<RESERVE-OPEN> 78504050
<PROVISION-CURRENT> 46526207
<PROVISION-PRIOR> (2448614)
<PAYMENTS-CURRENT> 18642962
<PAYMENTS-PRIOR> 26682489
<RESERVE-CLOSE> 77256192
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
