SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 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 (12 1/4) and low price (12), the ag-
gregate market value of voting stock held by non-affiliates of the registrant
as of March 31, 2000 was approximately $135,875,636.
Indicate the number of shares of each of the issuer's class of common stock, as
of the latest practicable date:
At March 31, 2000
Common Stock, $1.00 Par Value;
Issued: 11,558,166
Outstanding: 11,206,238
Total Pages: 21
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
Part I
Financial Information Page
Consolidated Financial Statements 3 - 7
Notes to Consolidated Financial Statements 8 - 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10 - 12
Condensed Statutory Financial
Statements of Insurance Subsidiaries 13
Part II
Other Information and Exhibits
Other Disclosures 15
Officers and Directors 16
Signatures 17
Exhibit 1 (Press Release) 18 - 21
2
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31, March 31,
2000 1999 1999
<S> <C> <C> <C>
ASSETS
Investments:
Available-for-sale investment securities, at fair value
U.S. Government bonds (amortized cost $38,138, $39,428
and $46,285, respectively) $ 39,580 $ 41,624 $ 50,162
State, municipal and political subdivision bonds (amortized
cost $78,143,564, $78,855,846 and $71,264,659, respectively) 81,758,869 82,075,148 77,268,888
Corporate bonds and notes (amortized cost $1,121,747,
$1,123,983 and $627,419, respectively) 1,092,529 1,093,715 603,240
Equity securities:
Common stock (cost $128,276,077, $125,913,872 and
$116,941,403, respectively) 119,475,929 116,656,582 125,422,809
Nonredeemable preferred stock (cost $5,440,942, $5,725,500
and $5,883,941, respectively) 4,795,435 5,695,567 7,166,883
Investment real estate, at cost, net of depreciation 10,669,674 10,540,426 10,138,901
Short-term investments, at cost which
approximates fair value 3,927,544 1,982,122 11,494,374
Total Investments 221,759,560 218,085,184 232,145,257
Cash 1,336,084 1,080,435 566,618
Accrued investment income 1,981,287 1,927,901 1,817,278
Receivables from agents, insureds and others, less allowance for
doubtful accounts of $530,000, $530,000 and $515,000, respectively 16,977,606 14,892,647 16,040,124
Balances due from reinsurers 425,338 71,755 2,382,245
Funds held by ceding reinsurers 40,000 40,000 35,756
Federal income taxes recoverable - 686,240 -
Deferred income taxes 4,205,197 4,153,393 -
Deferred insurance acquisition costs 13,064,396 12,644,189 13,853,454
Prepaid reinsurance premiums 1,354,715 1,287,627 803,043
Due from securities brokers 680,452 639,136 4,419,550
Other assets 2,747,846 2,114,074 1,865,252
Total Assets $264,572,481 $257,622,581 $273,928,577
</TABLE>
3
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31, March 31,
2000 1999 1999
<S> <C> <C> <C>
LIABILITIES
Policy liabilities and accruals:
Reserve for losses $ 52,356,662 $ 53,575,780 $ 59,014,448
Reserve for loss adjustment expenses 23,389,541 23,680,412 22,986,838
Unearned premiums 40,802,756 39,454,257 39,079,570
Total Policy Liabilities and Accruals 116,548,959 116,710,449 121,080,856
Accounts payable 3,834,071 3,950,898 3,238,492
Claim Draft Outstanding 2,161 240 1,854,701 2,656,117
Due to securities brokers 357,083 - 2,152,923
Balances due to reinsurers 2,061,545 1,541,460 1,610,379
Accrued premium taxes 316,594 338,863 178,155
Federal income taxes payable 1,759,336 - 1,404,733
State income taxes payable 91,197 - 76,097
Deferred income taxes - - 4,220,295
Total Other Liabilities 10,581,066 7,685,922 15,537,191
Total Liabilities 127,130,025 124,396,371 136,618,047
SHAREHOLDERS' INVESTMENT
Common stock, $1.00 par value, authorized 15,000,000 shares,
issued 11,558,166, 11,538,970 and 11,535,761, respectively 11,558,166 11,538,970 11,535,761
Paid-in surplus 22,727,877 22,594,538 22,278,651
Accumulated other comprehensive income, net of derred taxes
of ($2,050,343), ($2,133,595) and $5,511,896, respectively (3,807,783) (3,962,398) 10,236,379
Retained earnings 108,469,296 103,577,193 93,755,298
Shareholders' investment before treasury stock 138,947,556 133,748,303 137,806,089
Treasury stock, 351,928, 271,071 and 307,196 shares,
respectively, at cost (1,505,100) (522,093) (495,559)
Total Shareholders' Investment 137,442,456 133,226,210 137,310,530
Total Liabilities and Shareholders' Investment $264,572,481 $257,622,581 $273,928,577
Book Value Per Share $ 12.26 $ 11.82 $ 12.23
Shares Outstanding 11,206,238 11,267,899 11,228,565
</TABLE>
4
<TABLE>
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For The Three Months Ended March 31, 2000 and 1999
<CAPTION>
2000 1999
<S> <C> <C>
REVENUES
Premiums earned $ 20,666,549 $ 20,511,600
Net investment income 2,258,601 2,145,330
Realized investment gains 1,046,508 2,354,246
Other revenues 71,404 78,626
Total Revenues 24,043,062 25,089,802
LOSSES AND EXPENSES INCURRED
Losses incurred 5,928,036 9,766,940
Loss adjustment expenses incurred 1,911,201 1,923,299
Underwriting, acquisition and
insurance expenses 8,005,872 6,862,781
Increase in deferred insurance
acquisition costs (420,207) (328,677)
Other expenses 343,877 326,398
Total Losses and Expenses Incurred 15,768,779 18,550,741
Income from operations before
income taxes 8,274,283 6,539,061
Income tax expense (benefit)
Current 2,728,463 1,824,610
Deferred (135,059) 189,399
2,593,404 2,014,009
Net Income $ 5,680,879 $ 4,525,052
INCOME PER SHARE - BASIC $ 0.50 $ 0.40
Weighted Average Number of Shares Outstanding - Basic 11,257,512 11,216,162
INCOME PER SHARE - DILUTED $ 0.50 $ 0.40
Weighted Average Number of Shares Outstanding - Diluted 11,295,233 11,259,274
5
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS INVESTMENT
<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)
Purchase 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)
Comprehensive income
Net income - - 5,680,879 - 5,680,879 -
Other comprehensive income
Unrealized appreciation on available-for
sale securities, net of deferred taxes - - 834,845 - - -
Less: reclassification adjustment, net of
tax of $366,278, for gain included
in net income - - (680,230) - - -
Other comprehensive income - - 154,615 154,615 - -
Comprehensive income - - 5,835,494 - - -
Stock options exercised 19,196 133,339 - - - (76,250)
Purchases and sales of treasury stock, net - - - - - (906,757)
Cash dividend declared - - - - (788,776) -
Balance, March 31, 2000 $11,558,166 $22,727,877 $ - $(3,807,783) $108,469,296 $(1,505,100)
6
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
March 31, December 31, March 31,
2000 1999 1999
Cash flows provided by operating activities:
<S> <C> <C> <C>
Net Income $ 5,680,879 $ 16,712,463 $ 4,525,052
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 270,830 1,161,702 254,194
Realized investment gains (1,046,508) (8,184,101) (2,354,246)
Change in:
Deferred insurance acquisition costs (420,207) 880,588 (328,677)
Unearned premiums 1,348,499 (2,087,175) (2,461,862)
Allowance for doubtful accounts receivable from agents - 30,000 15,000
Accrued investment income (53,386) (248,903) (138,280)
Receivables from agents, insureds and others (2,084,959) 2,294,999 1,162,522
Balances due to/from reinsurers 153,792 317,498 575,235
Reinsurance recoverable on paid and unpaid losses 12,710 1,026,426 (1,472,882)
Funds held by ceding reinsurers - (4,244) -
Income taxes payable/recoverable 2,536,773 (635,702) 1,531,368
Deferred income taxes (135,056) (538,796) 189,399
Due to/from securities brokers 315,767 763,512 (863,979)
Prepaid reinsurance premiums (67,088) (560,553) (75,969)
Other assets (677,371) 332,788 (85,247)
Reserve for losses and loss adjustment expenses (1,509,989) (1,247,858) 3,497,236
Accounts payable 189,712 (371,947) (282,937)
Accrued premium taxes (22,269) 101,692 (59,016)
Net cash provided by operating activities 4,492,129 9,076,813 3,626,911
Cash flows provided by (used for) investing activities:
Proceeds from sales of available-for-sale investments 2,599,193 29,718,246 6,703,954
Purchases of available-for-sale investments (6,815,685) (44,377,254) (13,116,561)
Maturities of available-for-sale investments 1,724,072 8,690,009 2,703,969
Purchase of depreciable assets (124,812) (751,534) (148,764)
Net cash used for investing activities (2,617,232) (6,720,533) (3,857,402)
Cash flows provided by (used for) financing activities:
Cash dividends paid (788,776) (3,151,515) (785,999)
Stock options exercised 76,285 40,808 38,670
Net proceeds from sale of treasury stock (906,757) 290,424 -
Net cash used for financing activities (1,619,248) (2,820,283) (747,329)
Net increase (decrease) in cash 255,649 (464,003) (977,820)
Cash, beginning of period 1,080,435 1,544,438 1,544,438
Cash, end of period $ 1,336,084 $ 1,080,435 $ 566,618
Cash paid during the year for:
Income taxes $ 1,713,260 $ 8,611,726 $ 858,200
</TABLE>
7
CAPITOL TRANSAMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 and common
stock equivalents from options outstanding. The following table sets
forth the computation of basic and diluted EPS:
<TABLE>
<CAPTION>
March 31, Dec. 31, March 31,
2000 1999 1999
<S> <C> <C> <C>
Numerator:
Consolidated net income $ 5,680,879 $16,712,463 $ 4,525,052
Denominator:
Denominator for basic EPS-weighted average shares 11,257,512 11,252,358 11,216,162
Effect of dilutive securities- employee stock options 37,721 44,931 43,112
Denominator for diluted EPS 11,295,233 11,297,289 11,259,274
</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 differ-
ences between the carrying amounts of assets and liabilities for finan-
cial statement purposes and the amounts used for income taxes.
(5) Common Stock Options
There were 19,196 options exercised during the three months ended March
31, 2000 and there were 6,385 options exercised during the three
months ended March 31, 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 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.
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.
8
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 matur-
ities 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 $1,274,060, $1,173,643 and $873,885 as of March 31, 2000,
December 31, 1999 and March 31, 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 allegedly
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 Accounting
Standards Board's Statement of Financial Standards No. 131, "Disclo-
sures about Segments of an Enterprise and Related Information. "The
adoption of SFAS No. 131 did not affect results of operations or
financial position, but did affect the disclosures of segment inform-
ation.
The Company has three business segments, which are segregated based on
the types of products and services provided. The segments are
(1) property and casualty, (2) fidelity and surety, and (3) discon-
tinued reinsurance assumed operations. These segments constitute 100%
of the operations of the Company. Data for each segment as required
for interim reporting follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31, March 31,
2000 1999 1998
<S> <C> <C> <C>
Total Revenues:
Property & Casualty $17,195,635 $17,215,139 $17,253,335
Fidelity & Surety 4,754,952 4,840,719 5,992,016
Reinsurance Assumed 152,475 171,186 110,136
Totals: $22,103,062 $22,227,044 $23,355,487
Before-tax Profit (Loss):
Property & Casualty $ 2,982,772 $ 4,684,629 $ 4,215,351
Fidelity & Surety 2,044,964 (1,078,525) (1,063,317)
Reinsurance Assumed 1,023,635 139,475 42,152
Totals: $ 6,051,371 $ 3,745,579 $ 3,194,186
Reconcillation to Consolidated GAAP:
Capital and Surplus $ 1,821,154 $ 2,327,809 $ 1,718,987
Inter-company adjustments 401,758 465,673 (232,909)
Consolidated net income before tax: $ 8,274,283 $ 6,539,061 $ 4,680,264
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 subsidiaries, both
property-casualty and fidelity-surety insurance. The property-casualty segment
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
a 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 casualty insurance industry as a whole. Management feels strongly
that rate regulators have been slow to adjust rates in response to increased
claim costs from the factors noted above. This, when combined with increased
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, management believes that the property-
casualty insurance industry is in a downward cycle. However, due to a
combination of 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 quarter of 2000 were quite favorable. Gross premiums
written increased $4.0 million or 20.8% this year compared with the first
quarter of 1999, and the Company's combined ratio continued its downward
trend to a level more typical of Capitol Transamerica's history. Management
is confident that the return to solid underwriting standards and increased
profitability of the Company's core operations will provide a foundation for
increasing shareholder value.
For the three months ended March 31, 2000 gross premiums written totaled
$23,364,959 compared to $19,335,808 for the same period last year. Net
premiums followed suit, increasing from $17,973,769 in the first quarter of
1999 to $21,947,960 in 2000, an increase of 22.1%.
Premiums earned are recognized as net revenues after reduction for reinsurance
ceded and after establishment of the provision for the pro-rata unearned portion
of premiums written. Net premiums earned totaled $20,666,549 for the first
quarter of 2000 compared to $82,841,104 for the year 1999 and $20,511,600 for
the first quarter of 1999. The unearned premium reserve was $40,802,756,
$39,454,257 and $39,079,570 at each period end.
<TABLE>
<CAPTION>
March 31, December 31, March 31,
2000 1999 1999
<S> <C> <C> <C>
Gross Premiums Written $23,364,959 $86,002,801 $19,335,808
Reinsurance Ceded 1,416,999 5,809,425 1,362,039
Net Premiums Written $21,947,960 $80,193,376 $17,973,769
Net Premiums Earned $20,666,549 $82,841,104 $20,511,600
Net Unearned Premium Reserve $40,802,756 $39,454,257 $39,079,570
10
The Companys underwriting results can be measured by reference to the combined
loss and espense 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 under-
writing expenses are stated as a ratio of net premiums written. The combined
ratios were as follows:
<CAPTION>
March 31, December 31, March 31,
Insurance Operating Ratios (Statutory Basis): 2000 1999 1999
<S> <C> <C> <C>
Losses and Loss Adjustment Expenses 38.1% 54.9% 57.2%
Underwriting Expenses 37.3% 37.0% 39.4%
Combined Ratios 75.4% 91.9% 96.6%
The re-underwriting of the book of business has led to a sharp decline in the loss and loss
adjustment expense ratio. The Company's combined ratio continues to compare very favorably
to the industry average, which was 110.1% for the year 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 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 securities 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 disount. Dividends on equity securities are recorded as
income on ex-dividend dates.
<TABLE>
<CAPTION>
March 31, December 31, March 31,
Investments: 2000 1999 1999
<S> <C> <C> <C>
Invested Assets $ 221,759,560 $ 218,085,184 $ 232,145,257
Net Investment Income 2,258,601 9,136,244 2,145,330
Percent of Return to
Average Carrying Value 4.1% 4.2% 4.0%
Realized Gains 1,046,508 8,184,101 2,354,246
Change in Unrealized Gains $ 154,615 $ (21,981,943) $ (7,783,166)
</TABLE>
The net unrealized gain of $154,615 for the first quarter of 2000 was comprised
of a $275,595 unrealized gain on fixed maturities and a $102,980 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 the three months of 2000 increased $113,271 over the
same period last year, an increase of 5.3%. The Company holds a larger per-
centage of equity investments than is typical for the property-casualty in-
dustry, 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 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 reserve for
losses and loss adjustment expenses were $75,746,203 as of March 31, 2000
compared with $82,001,286 as of March 31, 1999. This decrease is a reflection
of the more favorable loss development trend the Company has experienced in
1999 and the first quarter of 2000. 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 (83.8%, 84.7% and 84.7% 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 disruptions 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 different 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
March 31, 2000, December 31, 1999 and March 31, 1999
CAPITOL INDEMNITY CORPORATION March 31, December 31, March 31,
Balance Sheets 2000 1999 1999
<S> <C> <C> <C>
ASSETS
Cash and Invested Assets $ 209,446,195 $204,375,352 $212,626,781
Other Assets 21,189,410 16,790,134 20,706,919
Total Assets $ 230,635,605 $221,165,486 $223,333,700
LIABILITIES
Reserve for Losses and Loss Expenses $ 75,869,736 $ 77,044,646 $ 79,136,295
Unearned Premiums 39,448,041 38,166,630 38,276,527
Other Liabilities 17,951,475 14,383,974 19,580,076
Total Liabilities 133,269,252 129,595,250 136,992,898
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 97,366,353 91,570,236 96,340,802
Total Liabilities and Capital $ 230,635,605 $221,165,486 $233,333,700
Statements of Income
Premiums Earned $ 20,666,549 $ 82,841,104 $ 20,511,600
Underwriting Deductions 16,230,101 75,368,177 18,957,838
Net Underwriting Gain 4,436,448 7,472,927 1,553,762
Investment Income Including Sales 3,183,552 15,876,984 4,297,147
Other Income 74,115 247,184 78,985
Dividends to Policyholders - 363,074 -
Income Tax Expense 2,551,857 6,927,999 1,669,407
Net Income $ 5,142,258 $ 16,306,022 $ 4,260,487
CAPITOL SPECIALTY INSURANCE CORPORATION
Balance Sheets
ASSETS
Cash and Invested Assets $ 4,309,467 $ 4,648,359 $ 5,506,271
Other Assets 185,595 224,846 482,834
Total Assets $ 4,495,062 $ 4,873,205 $ 5,989,105
LIABILITIES
Reserve for Losses and Loss Expenses $ - $ - $ 367,612
Unearned Premiums - - -
Other Liabilities 7,712 7,711 8,610
Total Liabilities 7,712 7,711 376,222
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 4,487,350 4,865,494 5,612,883
Total Liabilities and Capital $ 4,495,062 $ 4,873,205 $ 5,989,105
Statements of Income
Premiums Earned $ - $ - $ -
Underwriting Deductions 2,615 6,659 5,265
Net Underwriting (Loss) Gain (2,615) (6,659) (5,265)
Investment Income Including Sales 71,322 950,853 68,293
Other Income - - -
Income Tax Expense 7,714 255,061 2,311
Net Income $ 60,993 $ 689,133 $ 60,717
</TABLE>
13
PART II
14
Other Disclosures
Item 1. Legal Proceedings
Reference is made to footnote number 7 "Contingent
Liabilities" on Page 9 of this report.
Item 2. Changes in Securities
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
Reference is made to the Notice of Annual Meeting of
Shareholders and Proxy Statement for the Annual
Meeting of Shareholders which was held May 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
Deforest, Wisconsin Madison, Wisconsin
Larry Burcalow Reinhart H. Postweiler
Owner and President Retired-formerly with
Yahara Materials, Inc. Flad Affiliated Corp.
Middleton, Wisconsin Madison, Wisconsin
George A. Fait Kenneth P. Urso
Chairman of the Board Owner and Operator
and President Urso and Associates, LLC
Capitol Transamerica Corporation Middleton, Wisconsin
Madison, Wisconson
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: May 5, 2000
17
EXHIBIT I
CAPITOL TRANSAMERICA CORPORATION
FOR IMMEDIATE RELEASE Contact: Paul J. Breitnauer
Phone (608) 232-0402
CAPITOL TRANSAMERICA CORPORATION REPORTS
21% INCREASE IN FIRST QUARTER PREMIUMS
Madison, Wisconsin, May 2, 2000- Capitol Transamerica Corporation (Nasdaq:
CATA) announced first quarter earnings of $5.7 million or $0.50 per diluted
share compared to $4.5 milliion or $0.39 per diluted share for the first quar-
ter of 1999, an increase of 25.5%. The increase was due to a very favorable
trend in underwriting income, which increased from $2.0 million for the first
quarter of 1999 to $4.9 million for the same period this year. Earnings in the
first quarter included $680,000 of after-tax realized investment gains compared
with $1.5 million for the first quarter of 1999. Excluding after-tax realized
investment gains, earnings for the first quarter of 2000 were $0.44 per diluted
share compared to $0.27 per diluted share in 1999. Unless otherwise stated, all
per share amounts are presented on a diluted basis.
The company's statutory combined loss and expense ratio through the first
quarter of 2000 was 75.4%, down from 91.9% for the year 1999 and 96.6% for the
first quarter of 1999. The company's combined ratio compares most favorably
with the commercial property and casualty industry average, which was 110.1%
for the year 1999.
Gross premiums written for the quarter were $23.4 million, a 20.8% increase
over the $19.3 million written in the first quarter last year. Net premiums
written followed suit, increasing 22.1% from $18.0 million in the first quarter
of 1999 to $21.9 million in the first quarter this year. The increase in
premiums is due to increased marketing effots, the introduction of innovative
new coverages and programs and increased rates on certain lines of the property
and casualty business.
Net investment income reached $2.3 million through the first three months
of 2000 compared to $2.1 million for the same period last year, a 5.3% increase.
Cash and invested assets increased in the first quarter of the year, reaching
$223.1 million compared to $219.2 million at December 31, 1999. Beginning in the
fourth quarter of 1999 a larger percentage of the investment portfolio has been
directed to acquisition of municipal bonds. The company's investment portfolio
should begin to respond to this shift in investment philosophy. The unrealized
loss decreased from $4.0 million at December 31, 1999 to $3.8 million at March
31, 2000.
Shareholders' equity resumed the upward trend that has been typical for
the company since its founding 40 years ago, increasing from $133.2 million
($11.82 per share) at December 31, 1999 to $137.4 million ($12.26 per share) at
March 31, 2000, an increase of 3.2%. Shareholders' equity has increased at a
compound annual growth rate of approximately 17.5% over the past ten years. The
company continued its regular quarterly dividend policy of $.07 per share in
the first quarter of 2000.
Commenting on the results, George A. Fait, Chairman, state that "We are very
pleased to report positive results from both an underwriting and shareholder in-
vestment standpoint. The resumption of prudent underwriting standards combined
with increased marketing efforts has provided significant underwriting gains for
the first quarter of this year and will provide the foundation for increasing
shareholder value in the future. The shift in investment strategy has also begun
to pay off, which when combined with the profitability of our core operations
has led to an increase in shareholder equity. Management is optimistic that
these positive trends will continue through the year 2000 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 can be found at www.captrans.com.
Capitol Transamerica Corporation, with 11.2 million shares outstanding, is
traded on the National Over-the-Counter Stock Market under the symbol CATA.
SAFE HARBOR STATEMENT
Some of the statements in this news release, 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 Pri-
vate Securities Litigation Reform act of 1995. Such forward-looking statements
involve known and unknown risks, estimates subject to change and circumstances,
uncertainties and other factors that may cause the actual results, performance
or achievements of the company to be materially different from any future re-
sults, performance or achievements expressed or implied by the forward-looking
statements.
FINANCIAL HIGHLIGHTS FOLLOW
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
(in thousands, except per share)
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three months ended March 31,
2000 1999
<S> <C> <C>
REVENUES
Gross premiums written $ 23,365 $ 19,336
Net premiums written 21,948 17,974
Net premiums earned $ 20,667 $ 20,512
EXPENSES
Claims and claim expenses 7,839 11,690
Other underwriting expenses 7,930 6,861
Total Losses and Expenses Incurred 15,769 18,551
Underwriting income 4,898 1,961
Investment income 2,259 2,145
Realized investment gains 1,046 2,354
Other income 71 79
Income from operations before income tax 8,274 6,539
Income tax expense 2,593 2,014
NET INCOME $ 5,681 $ 4,525
EARNINGS PER SHARE- BASIC $ 0.50 $ 0.40
EARNINGS PER SHARE- DILUTED $ 0.50 $ 0.39
<CAPTION>
COMPARATIVE FINANCIAL HIGHLIGHTS- Three Months Ended March 31,
2000 1999 1998 1997 1996
Per Share Information
<S> <C> <C> <C> <C> <C>
Income per share- diluted $ 0.50 $ 0.39 $ 0.31 $ 0.18 $ 0.30
Consolidated net income $ 5,681 $ 4,525 $ 3,461 $ 2,040 $ 3,280
Weighted average number
of shares outstanding-diluted 11,295 11,259 11,264 11,251 11,058
Book value per share $ 12.26 $ 12.23 $ 13.13 $ 10.28 $ 8.56
Shareholders' investment $ 137,442 $ 137,311 $ 147,105 $ 114,669 $ 94,811
Dividends paid $ 793 $ 792 $ 790 $ 1,911 $ 1,476
Company Statistics:
Gross premiums written $ 23,365 $ 19,336 $ 21,675 $ 20,287 $ 18,877
Net investment income $ 2,259 $ 2,145 $ 2,296 $ 2,147 $ 1,710
Cash and invested assets $ 223,096 $ 232,712 $ 254,056 $ 189,338 $ 151,217
Total assets $ 264,572 $ 273,929 $ 293,890 $ 226,628 $ 180,339
Insurance Operating Ratios,
Statutory Basis:
Loss and loss adjustment expenses: 38.1% 57.2% 59.0% 61.4% 49.9%
Underwriting expenses 37.3% 39.4% 34.6% 36.7% 34.5%
Combined ratios 75.4% 96.6% 93.6% 98.1% 84.4%
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
BALANCE SHEETS
(in thousands, except per share)
<CAPTION>
March 31, March 31
2000 1999
ASSETS
<S> <C> <C>
Investments
Available-for-sale investments at fair value
U.S. Government bonds (cost $38, and
$46, respectively) $ 40 $ 50
State and municipal bonds (cost $78,144,
and $71,265, respectively) 81,759 77,269
Corporate bonds (cost $1,122, and
$627, respectively) 1,092 603
Common stock (cost $128,276 and
$116,941, respectively) 119,476 125,423
Preferred stock (cost $5,441, and
$5,884, respectively) 4,795 7,167
Investment real estate 10,670 10,139
Short-term investments 3,928 11,494
Total Investments 221,760 232,145
Cash 1,336 567
Receivables 24,270 24,659
Other assets 17,206 16,558
TOTAL ASSETS $264,572 $273,929
LIABILITIES
Reserves for losses and loss adjustment expenses $ 75,746 $ 82,001
Unearned premiums 40,803 39,080
Other liabilities 10,581 15,537
TOTAL LIABILITIES $127,130 $136,618
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
15,000 shares, issued 11,558 and
11,536 shares, respectively $ 11,558 $ 11,536
Paid-in surplus 22,728 22,279
Accumulated other comprehensive (loss)
income, net of deferred taxes of
($2,050) and $5,512, respectively (3,808) 10,236
Retained earnings 108,469 93,755
Less treasury stock, 352 and 307 shares,
respectively, at cost (1,505) (495)
TOTAL SHAREHOLDERS' EQUITY 137,442 137,311
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $264,572 $273,929
SHAREHOLDERS' EQUITY PER SHARE $ 12.26 $ 12.23
SHARES OUTSTANDING 11,206 11,229
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 82,890,978
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 124,271,364
<MORTGAGE> 0
<REAL-ESTATE> 10,669,674
<TOTAL-INVEST> 221,759,560
<CASH> 1,336,084
<RECOVER-REINSURE> 425,338
<DEFERRED-ACQUISITION> 13,064,396
<TOTAL-ASSETS> 264,572,481
<POLICY-LOSSES> 75,746,203
<UNEARNED-PREMIUMS> 40,802,756
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 11,558,166
0
0
<OTHER-SE> 127,389,390
<TOTAL-LIABILITY-AND-EQUITY> 264,572,481
20,666,549
<INVESTMENT-INCOME> 2,258,601
<INVESTMENT-GAINS> 1,046,508
<OTHER-INCOME> 71,404
<BENEFITS> 7,839,237
<UNDERWRITING-AMORTIZATION> (420,207)
<UNDERWRITING-OTHER> 8,005,872
<INCOME-PRETAX> 8,274,283
<INCOME-TAX> 2,593,404
<INCOME-CONTINUING> 5,680,879
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,680,879
<EPS-BASIC> 0.50
<EPS-DILUTED> 0.50
<RESERVE-OPEN> 77,256,192
<PROVISION-CURRENT> 10,182,053
<PROVISION-PRIOR> (2,342,816)
<PAYMENTS-CURRENT> 2,160,720
<PAYMENTS-PRIOR> 7,188,506
<RESERVE-CLOSE> 75,746,203
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
