SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 2000 Commission file number: 0-2047
CAPITOL TRANSAMERICA CORPORATION (CTC)
(Exact name of registrant as specified in its charter)
A WISCONSIN CORPORATION 39-1052658
4610 University Avenue
Madison, Wisconsin 53705-0900
Registrant's telephone number, including area code: (608) 231-4450
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the regis-
trant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Based on the closing average of the high (11 13/16) and low price (11 1/2),
the aggregate market value of voting stock held by non-affiliates of the
registrant as of June 30, 2000 was approximately $129,174,726.
Indicate the number of shares of each of the issuer's class of common stock,
as of the latest practicable date:
At June 30, 2000
Common Stock, $1.00 Par Value;
Issued: 11,558,166
Outstanding: 11,082,014
Total Pages: 21
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Part I
Financial Information Page
Consolidated Financial Statements 3 - 7
Notes to Consolidated Financial Statements 8 - 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10 - 12
Condensed Statutory Financial
Statements of Insurance Subsidiaries 13
Part II
Other Information
Other Disclosures 15
Officers and Directors 16
Signatures 17
Exhibit 1 (Press Release) 18 - 21
2
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31, June 30,
2000 1999 1999
<S> <C> <C> <C>
ASSETS
Investments:
Available-for-sale investment securities, at fair value
U.S. Government bonds (amortized cost $36,729, $39,428
and $42,020, respectively) $ 38,158 $ 41,624 $ 45,297
State, municipal and political subdivision bonds (amortized
cost $77,472,800, $78,855,846 and $73,514,131, respectively) 80,912,733 82,075,148 78,690,577
Corporate bonds and notes (amortized cost $1,119,485,
$1,123,983 and $878,383, respectively) 1,091,332 1,093,715 849,020
Equity securities:
Common stock (cost $125,727,134, $125,913,872 and
$121,537,302, respectively) 114,456,520 116,656,582 137,043,056
Nonredeemable preferred stock (cost $5,809,582, $5,725,500
and $6,183,941, respectively) 5,006,663 5,695,567 7,520,735
Investment real estate, at cost, net of depreciation 10,800,128 10,540,426 10,282,768
Short-term investments, at cost which
approximates fair value 2,398,329 1,982,122 3,950,315
Total Investments 214,703,863 218,085,184 238,381,768
Cash 1,121,753 1,080,435 1,128,175
Accrued investment income 1,834,048 1,927,901 1,663,726
Receivables from agents, insureds and others, (less allowance for
doubtful accounts of $530,000 for each period) 20,393,815 14,892,647 19,424,051
Balances due from reinsurers 1,303,352 71,755 2,479,652
Funds held by ceding reinsurers 40,000 40,000 35,756
Federal Income taxes recoverable - 686,240 -
Deferred income taxes 4,973,709 4,153,393 -
Deferred insurance acquisition costs 14,060,118 12,644,189 14,115,040
Prepaid reinsurance premiums 1,558,020 1,287,627 1,047,296
Due from securities brokers 6,989,479 639,136 4,218,511
Other assets 3,044,207 2,114,074 2,234,599
Total Assets $270,022,364 $257,622,581 $284,728,574
</TABLE>
3
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31, June 30,
2000 1999 1999
<S> <C> <C> <C>
LIABILITIES
Policy liabilities and accruals:
Reserve for losses $ 54,279,583 $ 53,575,780 $ 54,619,303
Reserve for loss adjustment expenses 23,578,052 23,680,412 23,120,951
Unearned premiums 45,540,141 39,454,257 42,363,069
Total Policy Liabilities and Accruals 123,397,776 116,710,449 120,103,323
Accounts payable 3,380,360 3,950,898 3,212,105
Claim drafts outstanding 3,766,846 1,854,701 3,002,366
Due to securities brokers 201,633 - 1,009,992
Balances due to reinsurers 1,642,391 1,541,460 1,513,791
Accrued premium taxes 441,924 338,863 225,008
Federal income taxes payable 343,036 - 1,501,747
State income taxes payable 48,681 - 119,313
Deferred income taxes - - 6,414,103
Total Other Liabilities 9,824,871 7,685,922 16,998,425
Total Liabilities 133,222,647 124,396,371 137,101,748
SHAREHOLDERS' INVESTMENT
Common stock, ($1.00 par value, authorized 15,000,000 shares,
issued 11,558,166, 11,538,970 and 11,538,322, respectively) 11,558,166 11,538,970 11,538,322
Paid-in surplus 22,727,877 22,594,538 22,589,189
Accumulated other comprehensive income (net of deferred tax
(benefit) expense of ($3,031,113), ($2,133,595) and
and $7,697,519, respectively) (5,629,211) (3,962,398) 14,295,389
Retained earnings 111,085,182 103,577,193 99,699,485
Shareholders' investment before treasury stock 139,742,014 133,748,303 148,122,385
Treasury stock, (476,152, 271,071 and 268,146 shares,
respectively, at cost (2,942,297) (522,093) (495,559)
Total Shareholders' Investment 136,799,717 133,226,210 147,626,826
Total Liabilities and Shareholders' Investment $270,022,364 $257,622,581 $284,728,574
Book Value Per Share $ 12.34 $ 11.82 $ 13.10
Shares Outstanding 11,082,014 11,267,899 11,270,176
</TABLE>
4
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
For the Six Months For the Three Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUES
Premiums earned $ 42,080,648 $ 41,516,233 $ 21,414,099 $21,004,633
Net investment income 4,502,403 4,438,879 2,243,802 2,293,549
Realized investment gains 3,978,978 5,260,243 2,932,470 2,905,997
Other revenues 157,413 129,070 86,009 50,444
Total Revenues 50,719,442 51,344,425 26,676,380 26,254,623
LOSSES INCURRED AND EXPENSES
Losses incurred 17,127,494 15,690,363 11,199,458 5,923,423
Loss adjustment expenses incurred 4,918,748 4,097,851 3,007,547 2,174,552
Underwriting, acquisition and
insurance expenses 16,441,863 15,062,077 8,435,991 8,199,296
Increase in deferred insurance
acquisition costs (1,415,929) (590,263) (995,722) (261,586)
Other expenses 705,708 670,716 361,831 344,318
Total Losses Incurred and
Expenses 37,777,884 34,930,744 22,009,105 16,380,003
Income from operations before
income taxes 12,941,558 16,413,681 4,667,275 9,874,620
Income tax expense
Current 3,791,729 4,958,648 1,063,266 3,134,038
Deferred 77,199 197,586 212,258 8,187
3,868,928 5,156,234 1,275,524 3,142,225
Net Income $ 9,072,630 $ 11,257,447 3,391,751 6,732,395
INCOME PER SHARE-BASIC $ 0.81 $ 1.00 $ 0.30 $ 0.60
Weighted Average Number of Shares
Outstanding-Basic 11,224,260 11,230,192 11,224,260 11,230,192
INCOME PER SHARE-DILUTED $ 0.81 $ 1.00 $ 0.30 $ 0.60
Weighted Average Number of Shares
Outstanding-Diluted 11,255,407 11,253,441 11,255,407 11,253,441
5
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
AND COMPREHENSIVE INCOME (LOSS)
<CAPTION>
Common Accumulated
Stock Other
(Par Value Paid-In Comprehensive Comprehensive Retained Treasury
$1.00) Surplus Income (Loss) Income (Loss) Earnings Stock
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $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 adjustment, 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 adjustment, 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 dividend declared - - - - (3,151,515) -
Balance, December 31, 1999 $11,538,970 $22,594,538 $ - $(3,962,398) $103,577,193 $ (522,093)
Comprehensive income
Net income - - 9,072,630 - 9,072,630 -
Other comprehensive income
Unrealized depreciation on available-for
sale securities, net of deferred taxes - - 919,523 - - -
Less: reclassification adjustment, net
of tax of $1,392,642, for gain included
in net income - - (2,586,336) - - -
Other comprehensive loss - - (1,666,813) (1,666,813) - -
Comprehensive income - - 7,405,817 - - -
Stock options exercised 19,196 133,339 - - - (76,250)
Purchases and sales of treasury stock, net - - - - - (2,343,954)
Cash dividend declared - - - - (1,564,641) -
Balance, June 30, 2000 $11,558,166 $22,727,877 $ - $(5,629,211) $111,085,182 $(2,942,297)
6
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
June 30, December 31, June 30,
2000 1999 1999
Cash flows provided by (used for) operating activities:
<S> <C> <C> <C>
Net Income $ 9,072,630 $ 16,712,463 $ 11,257,447
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 583,576 1,161,702 534,004
Realized investment gains (3,978,978) (8,184,101) (5,260,243)
Change in:
Deferred insurance acquisition costs (1,415,929) 880,588 (590,263)
Unearned premiums 6,085,884 (2,087,175) 821,637
Allowance for doubtful accounts receivable from agents - 30,000 30,000
Accrued investment income 93,853 (248,903) 15,272
Receivables from agents, insureds and others (5,501,169) 2,294,999 (2,236,405)
Balances due to/from reinsurers 310,137 317,498 391,207
Reinsurance recoverable on paid and unpaid losses (1,440,802) 1,026,426 (1,482,849)
Funds held by ceding reinsurers - (4,244) -
Income taxes payable/recoverable 1,077,957 (635,702) 1,671,598
Deferred income taxes 77,202 (538,796) 197,584
Due to/from securities brokers (6,148,710) 763,512 (1,805,871)
Prepaid reinsurance premiums (270,393) (560,553) (320,222)
Other assets (705,913) (332,788) (395,392)
Reserve for losses and loss adjustment expenses 601,443 (1,247,858) (763,796)
Accounts payable 1,341,607 (371,947) 36,925
Accrued premium taxes 103,061 101,692 (12,163)
Net cash provided by (used for) operating activities (114,544) 9,076,813 2,088,470
Cash flows provided by (used for) investing activities:
Proceeds from sales of available-for-sale investments 12,995,673 29,718,246 20,543,045
Purchases of available-for-sale investments (10,588,065) (44,377,254) (26,506,213)
Maturities of available-for-sale investments 2,179,652 8,690,009 5,078,478
Purchase of depreciable assets (599,088) (751,534) (397,605)
Net cash privided by (used for) investing activities 3,988,172 (6,720,533) (1,282,295)
Cash flows provided by (used for) financing activities:
Cash dividends paid (1,564,641) (3,151,515) (1,574,207)
Stock options exercised 76,285 40,808 61,345
Net (costs) proceeds from (purchase) sale of treasury stock (2,343,954) 290,424 290,424
Net cash used for financing activities (3,832,310) (2,820,283) (1,222,438)
Net increase (decrease) in cash 41,318 (464,003) (416,263)
Cash, beginning of period 1,080,435 1,544,438 1,544,438
Cash, end of period $ 1,121,753 $ 1,080,435 $ 1,128,175
Cash paid during the year for:
Income taxes $ 3,429,748 $ 8,611,726 $ 4,087,024
</TABLE>
7
CAPITOL TRANSAMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(1) Basis of Presentation
The condensed financial statements included herein of Capitol
Transamerica Corporation (the "Company"), other than the Consolidated
Balance Sheet as of December 31, 1999, and the Consolidated Statement
of Cash Flows as of December 31, 1999, have been prepared by the Compa-
ny without audit, pursuant to the rules and regulations of the
Securities Exchange Commission. Certain information and footnote dis-
closures normally included in financial statements prepared in accor-
dance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations.
Although the Company believes the disclosures are adequate to make the
information presented not misleading, it is suggested that these con-
densed financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's 1999 annual
report on Form 10-K.
(2) Income Per Share
Basic income per share is computed by dividing net income by the
weighted-average number of shares of stock outstanding during the
period. Diluted income per share is computed by dividing net income
by the weighted-average number of shares of common stock equivalents
from options outstanding. The following table sets forth the
computation of basic and diluted EPS:
<TABLE>
<CAPTION>
June 30, Dec. 31, June 30,
2000 1999 1999
<S> <C> <C> <C>
Numerator:
Consolidated net income $ 9,072,630 $16,712,463 $11,257,447
Denominator:
Denominator for basic EPS - weighted average shares 11,224,260 11,252,358 11,230,192
Effect of dilutive securities - employee stock options 31,147 44,931 23,249
Denominator for diluted EPS - weighted average shares 11,255,407 11,297,289 11,253,441
</TABLE>
(3) 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).
(4) Income Taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial statement purposes and the amounts used for income
taxes.
(5) Common Stock Options
There were 19,196 options exercised during the six months ended June
30, 2000 and there were 8,946 options exercised during the six
months ended June 30, 1999. For further information regarding stock
options, refer to Note 6 of Notes to Consolidated Financial
Statements included in the Company's 1999 annual report.
(6) Dividends
2000
On May 30, 2000 a cash dividend of $.07 per share was declared to
shareholders of record June 16, 2000 and paid June 28, 2000 in the
amount of $775,865.
On February 18, 2000, a cash dividend of $.07 per share was declared
to shareholders of record March 10, 2000 and paid March 23, 2000 in
the amount of $788,776.
1999
On October 20, 1999, a cash dividend of $.07 per share was declared
to shareholders of record December 9, 1999 and paid December 23,
1999 in the amount of $788,560.
8
On July 23, 1999 a cash dividend of $.07 per share was declared to
shareholders of record September 10,1999, and paid September 24,
1999 in the amount of $788,751.
On May 13, 1999 a cash dividend of $.07 per share was declared to
shareholders of record June 11, 1999, and paid June 25, 1999 in the
amount of $788,708.
On February 26, 1999 a cash dividend of $.07 per share was declared
to shareholders of record March 12, 1999 and paid March 26, 1999
in the amount of $785,999.
(7) Investments
Fixed maturities and equity securities are classified as available-for-
sale and, accordingly, are carried at fair value, with unrealized gains
and losses reported as a separate component of shareholders' investment
net of taxes. The cost of fixed maturities is adjusted for amortization
of premiums and accretion of discounts to maturity. Fixed maturities
and equity securities deemed to have declines in value that are
other than temporary are written down through the statement of
income to carrying values equal to their estimated fair values.
Investment real estate is carried at cost net of accumulated deprecia-
tion of $1,378,314, $1,173,643 and $962,159 as of June 30, 2000,
December 31, 1999 and June 30, 1999, 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.
(8) Contingent Liabilities
The Company is a defendant in certain lawsuits involving complaints
which demand damages and recoveries for claims and losses alledgedly
related to risks insured by the Company. In the opinion of management,
such lawsuits are routine in that they result from the ordinary course
of business in the insurance industry. The reserve for losses includes
management's estimates of the probable ultimate cost of settling all
losses involving lawsuits.
(9) Industry Segment Disclosures
Effective January 1, 1998, the Company adopted the Financial Account-
ing Standards Board's Statement of Financial Standards No. 131, "Dis-
closures about Segments of an Enterprise and Related Information."
The adoption of SFAS No. 131 did not affect results of operation 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) discon-
tinued reinsurance assumed operations. These segments constitute
100% of the operations of the Company. Data for each segment for
interim reporting follows:
<TABLE>
<CAPTION>
Year to Date
June 30, December 31, June 30,
2000 1999 1999
<S> <C> <C> <C>
Total Revenues:
Property & Casualty $ 35,439,114 $ 69,183,120 $ 35,134,996
Fidelity & Surety 9,964,334 19,587,513 9,889,077
Reinsurance Assumed 390,835 727,895 424,566
Totals: $ 45,794,283 89,498,528 45,448,639
Before-tax Profit (Loss):
Property & Casualty $ 3,328,671 $ 16,939,311 $ 9,711,547
Fidelity & Surety 2,332,441 (2,840,387) 244,328
Reinsurance Assumed 1,231,442 292,609 174,292
Totals: $ 6,892,554 $ 14,391,533 $ 10,130,167
Reconcilliation to Consolidated GAAP:
Capital and Surplus 4,707,998 9,466,745 5,591,816
Intercompany adjustments 1,341,006 52,419 691,698
Consolidated net income before tax: $ 12,941,558 $ 23,910,697 $ 16,413,681
There has been no material change in the allocation of assets among the segments, and
there has been no change in the method of measurement for the results of the segment
operations.
</TABLE>
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Capitol Transamerica Corporation (the "Company") is an insurance holding company
operating in 37 states which writes, through its insurance subsidiaries, both
property-casualty and fidelity-surety insurance. The property-casualty segement
accounts for approximately 75% of the business written while the fidelity-surety
segment accounts for approximately 25% of the Company's business.
The underwriting 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 inade-
quate rates, underwriting losses and, as a result, higher combined ratios. The
adequacy of premium rates is affected primarily by the severity and frequency of
claims which in turn are affected by natural disasters, regulatory measures and
court decisions which continue to uphold the "deep pocket" theory in awarding
against insurance companies. Unfortunately for the insurance industry, the trend
of increasing price competition has continued as has the number of significant
natural disasters. This combination has resulted in considerable reduction in
underwriting profitability for the industry as a whole.
Adequate premium rates continue to be of concern to the Company and the
property-casulaty industry as a whole. Management feels strongly that rate
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
management. The Company has responded to this challenge with increased
marketing efforts as well as the addition of innovative programs and alliances
that should position the Company for continued expansion and profitability.
OPERATING RESULTS
As mentioned in the Overview section, management believes the property-
casualty insurance industry is in a downward cycle. However, due to a
combination or increased marketing efforts and the re-underwriting of the
Company's book of business undertaken in 1998 and 1999, the Company's
operating results in the first six months of 2000 remain quite favorable.
Net income decreased compared to 1999 due to a reduction in capital gains
and strengthening of loss reserves. Gross premiums written increased $7.1
million, or 15.9% this year compared with the first six months of 1999,
and the Company's combined ratio is at 87.6%, a level typical of Capitol
Transamerica's history. Mangement is confident that the return to solid
underwriting standards and increased profitability or the Company's core
operations will provide a foundation for increasing shareholder value.
For the six months ended June 30, 2000, gross premiums written totaled
$51,758,281 compared to $44,658,675 for the same period last year. Net
premiums followed suit, increasing from $42,017,648 in the first six months
of 1999 to $47,896,139 in 2000,an increase of 14.0%
Premiuns earned are recognized as net revenues after reduction for reinsurance
ceded and after establishment of the provision for the prorata unearned por-
tion of premiums written. Net premiums earned totaled $42,080,648 for the
first six months of 2000 compared to $82,841,104 for the year 1999 and
$41,516,233 for the first six months of 1999. The unearned premium reserve
was $43,982,121, $39,454,257, and $42,363,069 at each period end.
<TABLE>
<CAPTION>
June 30, December 31, June 30,
2000 1999 1999
<S> <C> <C> <C>
Gross Premiums Written $51,758,281 $86,002,801 $44,658,675
Reinsurance Ceded 3,862,142 5,809,425 2,641,027
Net Premiums Written $47,896,139 $80,193,376 $42,017,648
Net Premiums Earned $42,080,648 $82,841,104 $41,516,233
Net Unearned Premium Reserve $43,982,121 $39,454,257 $42,363,069
10
The Company's underwriting results can be measured by reference to the com
-bined loss and expense ratios. This tabulation includes the operating
results of the two subsidiary insurance companies on a statutory basis.
Losses and loss adjustment expenses are stated as a ratio of net premiums
earned, while underwriting expenses are stated as a ratio of net premiums
written. The combined ratios were as follows:
<CAPTION>
June 30, December 31, June 30,
Insurance Operating Ratios (Statutory Basis): 2000 1999 1999
<S> <C> <C> <C>
Loss and Loss Adjustment Expenses 52.6% 54.9% 47.9%
Underwriting Expenses 35.0% 37.0% 36.7%
Combined Ratios 87.6% 91.9% 84.6%
The Company's combined loss and expense ratios compare very favorably with the industry average,
as indicated by the following chart:
<CAPTION>
Year-to date Year-end Year-end
2000 1999 1998
<S> <C> <C> <C>
Combined Ratios 87.6% 91.9% 95.0%
Industry Average * 107.4% 110.5% 107.4%
* The industry number for YTD 2000 is as of March 31, 2000.
</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 oc-
currences in which a number of claims could produce a large aggregate loss.
Management continually monitors the Company's reinsurance program to obtain pro-
tection that should be adequate to ensure the availability of funds for losses
while maintaining future growth.
NET INVESTMENT INCOME AND REALIZED GAINS
The Company's fixed maturities and equity securites are classified as
available-for-sale and are carried at fair value. The unrealized gains and
losses, net of tax, are reported as "Accumulated Other Comprehensive Income
(Loss)" in the equity portion of the balance sheet.
Interest and Dividend Income: Interest on fixed maturities is recorded as income
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>
June 30, December 31, June 30,
Investments: 2000 1999 1999
<S> <C> <C> <C>
Invested Assets $ 214,703,864 $ 218,085,184 $ 238,381,768
Net Investment Income 4,502,403 9,136,244 4,438,879
Percent of Return to
Average Carrying Value 4.0% 4.2% 4.2%
Realized Gains 3,978,978 8,184,101 5,260,243
Change in Unrealized Gains $ (1,666,813) $ (21,981,943) $ (5,729,466)
</TABLE>
The net unrealized loss of $1,666,813 for the first six months of 2000 was
comprised of a $144,287 unrealized gain on fixed maturities and a $1,811,100
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 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 the six months of 2000 increased $63,524 over the
same period last year, an increase of 1.4%. 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.
11
INCOME TAXES
Income tax expense is based on income reported for financial statement purposes
and tax laws and rates in effect for the years presented. Deferred federal in-
come taxes arise from timing differences between the recognition of income de-
termined for financial reporting purposes and income tax purposes. Such timing
differences are related principally to the deferral of policy acquisition costs,
the recognition of unearned premiums, and discounting the claims reserves for
tax purposes. Deferred taxes are also provided on unrealized gains and losses.
LOSS RESERVES
Reserves for loss and loss adjustment expenses reflect the Company's best esti-
mate of the liability for the ultimate cost of reported claims and incurred but
not reported (IBNR) claims as of the end of each period. The estimates are based
on past claim experience and consider current claim trends as well as social and
economic conditions. The Company's reserve for loss and loss adjustment expenses
were $77,857,635 as of June 30, 2000 compared with $77,740,254 as of June 30,
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 claims settlements,
acquisition and administrative expenses, investment purchases and dividends to
shareholders. In addition to satisfying obligations and cash outflow through
premium collections, there is cash inflow obtained from interest and dividend
income, maturities and sales of investments. Because cash inflow from premiums
is received in advance of cash outflow required to settle claims, the Company
accumulates funds which it invests pending liquidity requirements. Therefore,
investments represent the majority (79.5%, 84.7% and 83.7% at each respective
period) of the Company's assets. Cash outflow can be unpredictable for two rea-
sons: first, a large portion of liabilities representing loss reserves have un-
certainty regarding settlement dates; and second, there is potential for losses
occurring either individually or in aggregate. As a result, the Company main-
tains adequate short-term investment programs necessary to ensure the availa-
bility of funds. The investment program is structured so that a forced sale li-
quidation of fixed maturities should not be necessary during the course of ordi-
nary business involvement and activities. The Company has no material capital
expenditure commitments.
YEAR 2000
In prior years the Company discussed the nature and progress of its plans to
become 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 disruption in mission critical inform-
ation technology and non-information technology systems and believes those
systems successfully responded to the year 2000 date change.
The Company expensed approximately $90,000 during 1999 in connection with
remediating its systems. The Company is not aware of any material problems
resulting 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, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform act of 1995. Such forward-looking
statements involve known and unknown risks, estimates subject to change in
circumstances, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially differ-
ent from any future results, performance or achievements expressed or implied
by the forward-looking statements.
12
<TABLE>
INSURANCE SUBSIDIARY FINANCIAL STATEMENTS
Statutory Basis as Reported to State Regulatory Authorities
June 30, 2000, December 31, 1999 and June 30, 1999
CAPITOL INDEMNITY CORPORATION June 30, December 31, June 30,
Balance Sheets 2000 1999 1999
<S> <C> <C> <C>
ASSETS
Cash and Invested Assets $ 203,180,898 $204,375,352 $220,168,054
Other Assets 31,428,022 16,790,134 24,231,724
Total Assets $ 234,608,920 $221,165,486 $244,399,778
LIABILITIES
Reserves for Losses and Loss Expenses $ 77,492,685 $ 77,044,646 $ 74,883,066
Unearned Premiums 43,982,121 38,166,630 41,315,773
Other Liabilities 16,665,793 14,383,974 18,719,403
Total Liabilities 138,140,599 129,595,250 134,918,242
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 96,468,321 91,570,236 109,481,536
Total Liabilities and Capital $ 234,608,920 $221,165,486 $244,399,778
Statements of Income
Premiums Earned $ 42,080,648 $ 82,841,104 $ 41,516,233
Underwriting Deductions 39,231,150 75,368,177 35,678,044
Net Underwriting Gain 2,849,498 7,472,927 5,838,189
Investment Income Including Sales 8,264,815 15,876,984 9,395,688
Other Income 156,818 247,184 128,534
Dividends to Policyholders - 363,074 -
Income Tax Expense 3,508,842 6,927,999 4,637,377
Net Income $ 7,762,289 $ 16,306,022 $ 10,725,034
CAPITOL SPECIALTY INSURANCE CORPORATION
Balance Sheets
ASSETS
Cash and Invested Assets $ 4,325,909 $ 4,648,359 $ 5,444,508
Other Assets 213,128 224,846 81,624
Total Assets $ 4,539,037 $ 4,873,205 $ 5,526,132
LIABILITIES
Reserves for Losses and Loss Expenses $ - $ - $ -
Unearned Premiums - - -
Other Liabilities 7,713 7,711 193,046
Total Liabilities 7,713 7,711 193,046
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 4,531,324 4,865,494 5,333,086
Total Liabilities and Capital $ 4,539,037 $ 4,873,205 $ 5,526,132
Statements of Income
Premiums Earned $ - $ - $ -
Underwriting Deductions 3,645 6,659 7,040
Net Underwriting (Loss) Gain (3,645) (6,659) (7,040)
Investment Income Including Sales 130,373 950,853 813,810
Other Income - - -
Income Tax Expense 12,541 255,061 244,097
Net Income $ 114,187 $ 689,133 $ 562,673
</TABLE>
13
PART II
14
Other Disclosures
Item 1. Legal Proceedings
Reference is made to footnote number 8 "Contingent
Liabilities" on Page 9 of this report.
Item 2. Changes in Securities and Use of Proceeds
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
Reference is made to the Notice of Annual Meeting of
Shareholders and Proxy Statement for the Annual
Meeting of Shareholders which was held May 15, 2000,
both of which are dated April 7, 2000 and previously
filed with the Securities and Exchange Commission
and are incorporated herein as an exhibit by
reference.
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
NONE
15
CAPITOL TRANSAMERICA CORPORATION
Subsidiaries
Capitol Indemnity Corporation
Capitol Specialty Insurance Corporation
Capitol Facilities Corporation
Board of Directors
Paul J. Breitnauer Michael J. Larson
Vice President and Treasurer Principal
Capitol Transamerica Corporation Southwestern Financial Services
De Forest, Wisconsin Madison, Wisconsin
Larry Burcalow Reinhart H. Postweiler
Owner and President Retired-formerly with
Yahara Materials, Inc. Flad Affiliated Corporation
Middleton, Wisconsin Madison, Wisconsin
George A. Fait Kenneth P. Urso
Chairman of the Board Owner and Operator
and President Urso and Associates, LLC
Capitol Transamerica Corporation Middleton, Wisconsin
Madison, Wisconsin
Officers
George A. Fait Virgiline M. Schulte
Chairman of the Board and President Secretary
Paul J. Breitnauer Jane F. Endres
Vice President and Treasurer Assistant Secretary
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the under-
signed thereunto duly authorized.
CAPITOL TRANSAMERICA CORPORATION
George A. Fait
Chairman of the Board and President
Paul J. Breitnauer
Vice President and Treasurer
Date: August 11, 2000
17
EXHIBIT I
CAPITOL TRANSAMERICA CORPORATION
FOR IMMEDIATE RELEASE Contact: Paul Breitnauer
Phone (608) 232-0402
CAPITOL TRANSAMERICA CORPORATION REPORTS
RECORD PREMIUMS WRITTEN VOLUME
Madison, Wisconsin, July 28, 2000- Capitol Transamerica Corporation
(NASDAQ: CATA) reported a 15.9% written premium increase from $44.7 million
to $51.8 million for the six months ended June 30, 2000 over the 1999 period.
Improved marketing efforts, expanded insurance programs, and small rate in-
creases in certain business lines were the main reasons for the increase.
The $51.8 million written premium level represents a new six-month high for
the Company, exceeding the previous mark of $47.4 million by nearly 10%.
Gross written premiums for the three months ended June 30, 2000 was $28.4
million, also representing record volume, and $3.1 million or 12.1% higher
than that of the second quarter of 1999.
Operating earnings (excluding after-tax realized investment gains) for the
first six months of 2000 were $6.5 million or $0.58 per share (diluted unless
otherwise noted) vs. $7.8 million or $0.70 per share for the same period in
1999. For the second quarter, 2000 operating earnings were $1.5 million or
$0.13 per share compared with 1999 figures of $4.8 million or $0.43 per share.
Year-to-date earnings for the six months ending June 30, including $2.6
million of after tax realized investment gains, were $9.1 million or $0.81
per share. This compares with earnings of $11.3 million or $1.00 per share,
including $3.4 million of after tax realized investment gains, for the same
period in 1999. For the quarter ended June 30, earnings were $3.4 million
or $0.31 per share compared with second quarter 1999 earnings or $6.7
million or $0.60 per share.
Despite higher second quarter claims and claims expenses, the Company's
statutory combined loss and expense ratio for the first six months of 2000
was 87.6%. This ratio compares favorably to the industry-wide average,
which stood at 107.4% as of March 31, 2000. The Company has consistently
been lower than the industry average including combined ratios of 91.9%
vs. 110.5% for calendar year 1999 and 95.0% vs. 107.4% for calendar year 1998.
With total shareholders' equity of $136.8 million at June 30, book value per
share on shares outstanding increased to $12.34 from the December 31, 1999
book value of $11.82. The Company continued its regular dividend payment
of $0.07 per outstanding share during the second quarter.
18
Commenting on the results, Chairman George A. Fait stated that "The increase
in premiums written this year reflects continued positive news for the
Company and its shareholders. The record volume level of over $50 million
in written premium through six months brings with it challenges to maintain
our historical low loss ratios. With second quarter claims volume being
higher than expected, management continues to focus on obtaining positive
underwriting results and is vigorously investigating and managing claims
activity. With the future benefit of the increasing written premium volume
turning into top line earned premium growth as well as our other ongoing
profitability efforts, we anticipate significantly improved earnings for the
second half of the year and beyond."
Capitol Transamerica Corporation is an insurance holding company operating
a national insurance business writing specialty lines of commercial property
and casualty policies as well as fidelity and surety coverages through its sub-
sidiary insurance companies Capitol Indemnity Corporation and Capitol Specialty
Insurance Corporation. A third subsidiary, Capitol Facilities Corporation, pro-
vides premium financing for the insurance companies.
The Capitol Transamerica Group operates in 37 states and is rated A+
(Superior) by A.M. Best Company, Inc., an independent organization that
analyzes the insurance industry. The Company's website is www.captrans.com.
With 11.1 million shares outstanding, Capitol Transamerica's common stock is
traded on the NASDAQ Stock Exchange under the symbol CATA.
FINANCIAL HIGHLIGHTS FOLLOW
19
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share)
<CAPTION>
Six months ended Three months ended
June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUES
Gross premiums written $ 51,578 $ 44,659 $ 28,393 $ 25,323
Net premiums written 47,896 42,018 25,948 24,044
Net premiums earned $ 42,081 $ 41,516 21,414 21,004
EXPENSES
Claims and claim expenses 22,046 19,788 14,207 8,098
Other underwriting expenses 15,732 15,143 7,802 8,282
Total Losses and Expenses Incurred 37,778 34,931 22,009 16,380
Underwriting income (loss) 4,303 6,585 (595) 4,624
Investment income 4,503 4,439 2,244 2,294
Realized investment gains 3,979 5,260 2,933 2,906
Other income 157 129 86 50
Income Before Income Tax 12,942 16,413 4,668 9,874
Income tax expense 3,869 5,156 1,276 3,142
NET INCOME $ 9,073 $ 11,257 3,392 6,732
EARNINGS PER SHARE- BASIC $ 0.81 $ 1.00 $ 0.31 $ 0.60
EARNINGS PER SHARE- DILUTED $ 0.81 $ 1.00 $ 0.31 $ 0.60
<CAPTION>
COMPARATIVE FINANCIAL HIGHLIGHTS- Six Months Ended June 30,
2000 1999 1998 1997 1996
Per Share Information
<S> <C> <C> <C> <C> <C>
Income per share- diluted $ 0.81 $ 1.00 $ 0.93 $ 0.24 $ 0.67
Consolidated net income $ 9,073 $ 11,257 $ 10,493 $ 2,664 $ 7,432
Weighted average number
of shares outstanding
-diluted 11,255 11,253 11,243 11,111 11,066
Book value per share $ 12.34 $ 13.10 $ 12.95 $ 11.18 $ 8.89
Shareholders' investment $ 136,800 $ 147,627 $ 145,307 $ 124,692 $ 98,457
Dividends paid $ 1,585 $ 1,583 $ 1,581 $ 2,699 $ 2,222
Company Statistics:
Gross premiums written $ 51,758 $ 44,659 $ 46,464 $ 47,449 $ 43,653
Net investment income $ 4,503 $ 4,439 $ 4,583 $ 4,120 $ 3,497
Cash and invested assets $ 215,826 $ 239,510 $ 243,858 $ 208,948 $ 158,308
Total assets $ 270,022 $ 284,729 $ 288,942 $ 252,218 $ 191,135
Insurance Operating Ratios,
Statutory Basis:
Loss and loss adjustment
expenses: 52.6% 47.9% 60.4% 61.9% 50.8%
Underwriting expenses 35.0% 36.7% 33.7% 34.8% 32.2%
Combined ratios 87.6% 84.6% 94.1% 96.7% 83.0%
20
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
BALANCE SHEETS
(in thousands, except per share)
<CAPTION>
June 30, December 31, June 30,
2000 1999 1999
ASSETS
<S> <C> <C> <C>
Investments
Available-for-sale investments at fair value
U.S. Government bonds (cost $37, $39 and
$42, respectively) $ 38 $ 42 $ 45
State and municipal bonds (cost $77,473,
$78,856 and $73,514, respectively) 80,913 82,075 78,691
Corporate bonds (cost $1,119, $1,124 and
$878, respectively) 1,091 1,094 849
Common stock (cost $125,727, $125,914 and
$121,537, respectively) 114,457 116,657 137,043
Preferred stock (cost $5,810, $5,726 and
$6,184, respectively) 5,007 5,695 7,521
Investment real estate 10,800 10,540 10,283
Short-term investments 2,398 1,982 3,950
Total Investments 214,704 218,085 238,382
Cash 1,122 1,081 1,128
Receivables 35,494 22,299 27,786
Other assets 18,702 16,086 17,433
TOTAL ASSETS $270,022 $257,551 $284,729
LIABILITIES
Reserves for losses and loss adjustment expenses $ 77,858 $ 77,256 $ 77,740
Unearned premiums 45,540 39,454 42,363
Other liabilities 9,824 7,614 16,999
TOTAL LIABILITIES $133,222 $124,324 $137,102
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
15,000 shares, issued 11,558, 11,536 and
11,538, respectively $ 11,558 $ 11,536 $ 11,538
Paid-in surplus 22,728 22,571 22,589
Accumulated other comprehensive (loss) income,
net of deferred taxes of ($3,031), ($2,134)
and $7,698, respectively (5,629) (3,962) 14,295
Retained earnings 111,085 103,577 99,700
Less treasury stock, 476, 271, and 268 shares,
respectively, at cost (2,942) (495) (495)
TOTAL SHAREHOLDERS' EQUITY 136,800 133,227 147,627
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $270,022 $257,551 $284,729
SHAREHOLDERS' EQUITY PER SHARE $ 12.34 $ 11.82 $ 13.10
SHARES OUTSTANDING 11,082 11,268 11,270
21
</TABLE>
