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, 1998 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 (21 1/2) and low price (19 3/4), the
aggregate market value of voting stock held by non-affiliates of the registrant
as of March 31, 1998 was approximately $230,999,711.
Indicate the number of shares of each of the issuer's class of common stock, as
of the latest practicable date:
At March 31, 1998
Common Stock, $1.00 Par Value;
Issued: 11,524,002
Outstanding: 11,199,986
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
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31, March 31,
1998 1997 1997
(Restated)
ASSETS
Investments:
Available-for-sale investment securities, at fair value
U.S. Government bonds (amortized cost $65,765, $67,192
and $577,473, respectively) $ 70,641 $ 72,075 $ 580,851
State, municipal and political subdivision bonds (amortized
cost $65,899,343, $68,651,060 and $67,546,951, respectively) 70,772,667 73,239,504 71,654,830
Corporate bonds and notes (amortized cost $817,442,
$716,722 and $888,584, respectively) 468,849 759,937 956,169
Equity securities:
Common stock (cost $111,773,734, $101,409,300 and
$76,702,123, respectively) 162,178,627 145,208,469 100,797,004
Nonredeemable preferred stock (cost $6,197,248, $5,854,291
and $5,929,487, respectively) 8,336,338 6,928,541 6,695,155
Investment real estate, at cost, net of depreciation 8,206,367 8,122,638 6,690,905
Short-term investments, at cost which
approximates fair value 4,022,640 11,312,878 1,963,171
Total Investments 254,056,129 245,644,042 189,338,085
Cash 690,143 1,202,548 989,618
Accrued investment income 1,678,658 1,707,692 1,604,340
Receivables from agents, insureds and others, less allowance for
doubtful accounts of $455,000, $440,000 and $395,000, respectively 20,227,064 20,820,481 18,661,166
Balances due from reinsurers 1,287,480 122,916 -
Income taxes recoverable - 684,342 -
Deferred insurance acquisition costs 13,617,162 14,186,941 12,802,028
Prepaid reinsurance premiums 694,821 743,988 427,955
Due from securities brokers - - 768,750
Other assets 1,638,632 1,569,325 2,036,203
Total Assets $293,890,089 $286,682,275 $226,628,145
3
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31, March 31,
1998 1997 1997
(Restated)
LIABILITIES
Policy liabilities and accruals:
Reserve for losses $ 51,751,775 $ 48,570,173 $ 33,665,464
Reserve for loss adjustment expenses 22,741,983 22,902,165 18,382,985
Unearned premiums 45,487,384 47,411,849 42,469,597
Total Policy Liabilities and Accruals 119,981,142 118,884,187 94,518,046
Accounts payable 5,834,762 5,805,568 6,323,360
Due to securities brokers - 5,318,372 147,398
Balances due to reinsurers 1,945,913 1,337,564 1,676,650
Accrued premium taxes 260,447 337,163 313,592
Income taxes payable 731,405 - 346,935
Deferred income taxes 18,031,614 15,657,280 8,632,826
Total Other Liabilities 26,804,141 28,455,947 17,440,761
Total Liabilities 146,785,283 147,340,134 111,958,807
SHAREHOLDERS' INVESTMENT
Common stock, $1.00 par value, authorized 15,000,000 shares,
issued 11,524,002, 11,502,520 and 11,466,107, respectively 11,524,002 11,502,520 11,466,107
Paid-in surplus 21,912,129 21,832,206 21,483,784
Net unrealized appreciation on investment securities carried at
fair value, net of deferred taxes of $19,405,021, $16,833,386
and $9,873,393, respectively 37,668,568 32,676,572 19,165,996
Retained earnings 76,409,332 73,732,118 62,906,711
Shareholders' investment before treasury stock 147,514,031 139,743,416 115,022,598
Treasury stock, 324,016, 323,638 and 316,448 shares,
respectively, at cost (409,225) (401,275) (353,260)
Total Shareholders' Investment 147,104,806 139,342,141 114,669,338
Total Liabilities and Shareholders' Investment $293,890,089 $286,682,275 $226,628,145
Book Value Per Share $ 13.13 $ 12.46 $ 10.28
Shares Outstanding 11,199,986 11,178,882 11,149,659
4
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For The Three Months Ended March 31, 1998 and 1997
1998 1997
(Restated)
REVENUES
Premiums earned $ 22,248,261 $ 20,360,470
Net investment income 2,295,831 2,147,302
Realized investment gains 896,552 345,694
Other revenues 26,945 6,727
Total Revenues 25,467,589 22,860,193
LOSSES AND EXPENSES INCURRED
Losses incurred 11,433,308 10,695,811
Loss adjustment expenses incurred 1,629,775 2,142,597
Underwriting, acquisition and
insurance expenses 6,811,295 7,047,412
Decrease in deferred insurance
acquisition costs 569,779 176,286
Other expenses 343,168 323,745
Total Losses and Expenses Incurred 20,787,325 20,385,851
Income from operations before
income taxes 4,680,264 2,474,342
Income tax expense (benefit)
Current 1,417,023 576,669
Deferred (197,300) (142,664)
1,219,723 434,005
Net Income $ 3,460,541 $ 2,040,337
INCOME PER SHARE - BASIC $ 0.31 $ 0.18
Weighted Average Number of Shares Outstanding - Basic 11,168,127 11,092,524
INCOME PER SHARE - DILUTED $ 0.31 $ 0.18
Weighted Average Number of Shares Outstanding - Diluted 11,264,321 11,250,584
5
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS INVESTMENT
Net Unrealized
Common Appreciation
Common Stock (Depreciation)
Stock Distributable on Securities
(Par Value (Par Value Paid-In Carried at Retained Treasury
$1.00) $1.00) Surplus Fair Value Earnings Stock
Balance, January 1, 1996 $ 6,899,060 $ 689,545 $20,949,100 $13,259,988 $51,177,894 $ (321,707)
Net income - - - - 18,349,158 -
Unrealized appreication on available-for
sale securities, net of deferred taxes - - - 8,364,037 - -
Stock options exercised 24,106 - 165,544 - - (15,799)
Stock dividends 689,545 3,116,810 - - (3,806,355) -
Cash dividends declared - - - - (2,959,043) -
Balance, December 31, 1996 7,612,711 3,806,355 21,114,644 21,624,025 62,761,654 (337,506)
Net income - - - - 15,191,879 -
Unrealized appreciation on available-for
sale securities, net of deferred taxes - - - 11,052,547 - -
Stock options exercised 83,678 - 542,344 - - (63,769)
Proceeds from treasury share transactions - - 175,218 - - -
Stock dividends 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)
Net income - - - - 3,460,541 -
Unrealized appreciation on available-for
sale securities, net of deferred taxes - - - 4,991,996 - -
Stock options exercised 21,482 - 79,923 - - (7,950)
Cash dividends declared - - - - (783,327) -
Balance, March 31, 1998 11,524,002 - 21,912,129 37,668,568 76,409,332 (409,225)
6
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
March 31, December 31, March 31,
1998 1997 1997
Cash flows provided by operating activities: (Restated)
Net Income $ 3,460,541 $ 15,191,879 $ 2,040,337
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 253,594 1,018,894 218,992
Realized investment gains (896,552) (15,370,384) (345,694)
Change in:
Deferred insurance acquisition costs 569,779 (1,208,627) 176,286
Unearned premiums (1,924,465) 4,153,016 (789,236)
Allowance for doubtful accounts receivable from agents 15,000 60,000 15,000
Accrued investment income 29,034 (22,752) 80,600
Receivables from agents, insureds and others 578,417 (2,168,094) 36,221
Balances due to/from reinsurers 553,015 (284,774) 35,859
Reinsurance recoverable on paid and unpaid losses (1,109,230) 755,956 897,325
Funds held by ceding reinsurers 43,235 44,791 46,300
Income taxes payable 1,415,747 (2,554,594) (1,523,317)
Deferred income taxes (197,301) (78,292) (142,754)
Due to/from securities brokers (5,318,372) 11,191,845 5,252,121
Prepaid reinsurance premiums 49,167 (39,840) 276,193
Other assets 23,908 339,684 48,739
Reserve for losses and loss adjustment expenses 3,021,420 23,769,975 4,346,086
Accounts payable 29,194 (806,814) (289,023)
Accrued premium taxes (76,716) (225,410) (248,981)
Net cash provided by operating activities 519,415 33,766,459 10,131,054
Cash flows provided by (used for) investing activities:
Proceeds from sales of available-for-sale investments 5,817,238 44,747,214 10,173,366
Purchases of available-for-sale investments (7,044,564) (78,773,489) (19,121,648)
Maturities of available-for-sale investments 1,207,794 5,064,056 994,563
Purchase of depreciable assets (322,416) (477,992) (53,331)
Net cash used for investing activities (341,948) (29,440,211) (8,007,050)
Cash flows provided by (used for) financing activities:
Cash dividends paid (783,327) (4,226,165) (1,899,807)
Stock options exercised 101,405 626,022 416,181
Net proceeds from sale of treasury stock (7,950) 111,449 (15,754)
Net cash used for financing activities (689,872) (3,488,694) (1,499,380)
Net increase (decrease) in cash (512,405) 837,554 624,624
Cash, beginning of period 1,202,548 364,994 364,994
Cash, end of period $ 690,143 $ 1,202,548 $ 989,618
Cash paid during the year for:
Income taxes $ 1,100,781 $ 9,164,506 $ 2,100,000
7
CAPITOL TRANSAMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(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, 1997, and the Consolidated Statement
of Cash Flows as of December 31, 1997, 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.
A 1997 year-end analysis of operations determined that certain timing
related expense and revenue items had not been recorded properly
throughout the year. As a result, the Company has restated quarterly
results of operations for 1997 to reflect a more equitable distribution
of these items.
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 1997 annual
report on Form 10-K. Wherever applicable, prior period's information
has been restated to reflect the December 31,1996 three-for-two stock
split and the December 28, 1995 ten percent stock dividend.
(2) Income Per Share
Net income per share is computed by dividing net income by the weighted
average number of shares of stock outstanding during the period.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 128, "Earnings per Share," which replaces the
presentation of primary and fully diluted earnings per share (EPS)
with a presentation of basic and diluted EPS. the following table sets
forth the computation of basic and diluted EPS:
March 31,
1998 1997
(Restated)
Numerator:
Consolidated net income $ 3,460,541 $ 2,040,337
Denominator:
Denominator for basic EPS - weighted average shares 11,168,127 11,092,524
Effect of dilutive securities - employee stock options 96,194 158,060
Denominator for diluted EPS 11,264,321 11,250,584
(3) Income Taxes
Deferred income taxes reflect the net tax effects of temporary differ-
ences between the carrying amounts of assets and liabilities for finan-
cial statement purposes and the amounts used for income taxes.
(4) Common Stock Options
There were 21,482 options exercised during the three months ended March
31, 1998 and there were 47,041 options exercised during the three
Months ended March 31, 1997. For further information regarding stock
options, refer to Note 6 of Notes to Consolidated Financial Statements
included in the Company's 1997 annual report.
8
(5) Dividends
1998
On February 27, 1998 a cash dividend of $.07 per share was declared to
shareholders of record March 13, 1998 and paid March 27 in the amount
of $783,327.
1997
On October 24, 1997 a cash dividend of $.07 per share was declared to
shareholders of record December 10 and paid December 19 in the amount
of $782,718.
On July 25, 1997 a cash dividend of $.07 per share was declared to
shareholders of record September 12 and paid September 26 in the amount
of $781,711.
On May 6, 1997 a cash dividend of $.07 per share was declared to
shareholders of record June 13 and paid June 27 in the amount of
$780,878.
On January 20, 1997 a cash dividend of $.10 per share was declared to
shareholders of record February 14 and paid February 28 in the amount
of $1,114,823.
On January 20, 1997 as cash dividend of $.07 per share was declared to
shareholders of record March 14 and paid on March 28 in the amount of
$780,458.
(6) Investments
Fixed maturities and equity securities are classified as available-for-
sale and, accordingly, are carried at fair value, with unrealized gains
and losses reported as a separate component of shareholders' invest-
ment, net of taxes. The cost of fixed maturities is adjusted for amor-
tization of premiums and 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 $512,533, $444,381 and $244,509 as of March 31, 1998, December
31, 1997 and March 31, 1997, respectively.
Cost of investments sold is determined under the specific identifica-
tion method.
(7) Contingent Liabilities
The Company is a defendant in certain lawsuits involving complaints
which demand damages and recoveries for claims and losses alledgedly
related to risks insured by the Company. In the opinion of management,
such lawsuits are routine in that they result from the ordinary course
of business in the insurance industry. The reserve for losses includes
management's estimates of the probable ultimate cost of settling all
losses involving lawsuits.
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 70% of the business written while the fidelity-surety
segment accounts for approximately 30% of the Company's business.
The underwriting cylcles of the property-casualty insurance industry have been
characterized by peak periods of adequate rates, underwriting profits and lower
combined ratios, while the downward side of the cycle is characterized by inade-
quate rates, underwriting losses and, as a result, higher combined ratios. The
adequacy of premium rates is affected primarily by the severity and frequency of
claims which in turn are affected by natural disasters, regulatory measures and
court decisions which continue to uphold the "deep pocket" theory in awarding
against insurance companies. Unfortunately for the insurance industry, the trend
of increasing price competition has continued as has the number of significant
natural disasters. This combination has resulted in considerable reduction in
underwriting profitability for the industry as a whole.
Inflation also has a significant impact on the insurance industry in general, as
well as on the Company. Inflation creates higher claim costs, which are then
matched currently against premiums whose rating statistics were developed from
data of previous years. In recent inflationary periods, this has led to inade-
quate rate structures, since rate regualtors are slow to grant rate adjustments
at times when the overall economy is in an inflationary cycle. Studies have
shown that premium rates trail the claim experience by a period of two years or
more. Adequate premium rates continue to be of concern to the Company and the
property casulaty industry as a whole.
OPERATING RESULTS
As mentioned in the Overview section, the property-casualty insurance industry
is in a downward cycle. However, despite a difficult year in 1997, mangement
believes the results of the first quarter indicate that in 1998 the Company
will resume its historical trend of increasing profits and underwriting gains.
The Company's business plan includes expansion of existing products into new
geographic regions, as well as introduction of new coverages, which when
combined with prudent underwriting standards will assure continued profitabil-
ity for our shareholders. Indeed, when the industry's cycle reverses, the
Company will be in an excellenent position to take advantage of premium rate
increases.
For the quarter ended March 31, 1998 gross premiums written increased 6.8% over
the same period in 1997. The Company's goal for 1998 is to reach the $100
million mark in net premiums written. In 1997, Capitol Indemnity Corporation,
the Company's primary insurance subsidiary, became admitted in two states in
which it previously wrote only on a surplus lines basis, and in the first
quarter 1998 CIC became licensed in the state of Maryland. The Company also
expanded its workers compensation writings into Illinois in 1996 and Iowa 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 totaled $22,248,261, $87,451,620 and
$20,360,470 for the respective periods; and net unearned premiums were
$45,487,384, $47,477,849 and $42,469,597 at each respective period.
Restated
March 31, December 31, March 31,
1998 1997 1997
Gross Premiums Written $21,674,896 $99,507,846 $20,286,944
Reinsurance Ceded 1,301,933 7,943,050 439,517
Net Premiums Written $20,372,963 $91,564,796 $19,847,427
Net Premiums Earned $22,248,261 $87,451,620 $20,360,470
Net Unearned Premium Reserve $45,487,384 $47,411,849 $42,469,597
The large increase in ceded premiums in 1997 is due to a new reinsurance
agreement entered into during the year. CIC assumed and then fully ceded
dental capitation premiums while retaining a brokerage fee. The Company is
not expected to incur any net losses from this business.
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:
Restated
March 31, December 31, March 31,
Insurance Operating Ratios (Statutory Basis): 1998 1997 1997
Loss and Loss Adjustment Expenses 59.0% 70.1% 61.4%
Underwriting Expenses 34.6% 32.1% 36.7%
Combined Ratios 93.6% 102.2% 98.1%
In 1997 the Company strengthened IBNR reserves by $14.5 million, which increased
the loss ratio by 16.6%. Despite this large adjustment, the Company's com-
bined loss and expense ratio still compares favorably with the commercial
lines industry averages of 103.3% for 1997 and 105.5% for 1996.
REINSURANCE
The Company follows the customary practice of reinsuring with other companies,
e.g., ceding a portion of its exposure on the policies it has written. This pro-
gram of reinsurance permits the Company greater diversification of business and
the ability to write larger policies while limiting the extent of its maximum
net loss. It provides protection for the Company against unusually serious oc-
currences in which a number of claims could produce a large aggregate loss.
Management continually monitors the Company's reinsurance program to obtain pro-
tection that should be adequate to ensure the availability of funds for losses
while maintaining future growth.
NET INVESTMENT INCOME AND REALIZED GAINS
The Company's fixed maturities and equity securites are classified as
available-for-sale and are carried at fair value. The unrealized gains and
losses, net of tax, are reported as a separate component of shareholders'
investment.
Interest and Dividend Income: Interest on fixed maturities is recorded as income
when earned and is adjusted for any amortization of purchase premium or dis-
count. Dividends on equity securities are recorded as income on ex-dividend
dates.
March 31, December 31, March 31,
Investments: 1998 1997 1997
Invested Assets $ 254,056,129 $ 245,644,042 $ 189,338,085
Net Investment Income 2,295,831 8,580,713 2,147,302
Percent of Return to
Average Carrying Value 4.7% 4.9% 5.5%
Realized Gains 896,552 15,370,384 345,694
Change in Unrealized Gains(Losses) $ 7,563,631 $ 16,746,287 $ (3,724,285)
The $7,563,631 increase in unrealized gains for the first quarter of 1998 was
composed of a $106,933 decrease in market value over cost of the Company's
fixed maturities and a $7,670,564 increase in market value over cost of the
equity portfolio. The Company continued to move more of its investment
portfolio into equity securities in the first quarter of 1998. Future invest-
ment decisions will be determined based on the economy and the stock and
bond markets. Net investment income for the first quarter of 1998 was up 6.9%
over the first quarter of 1997, but the overall rate of return on our invest-
ment portfolio has decreased slightly. Before tax unrealized gains were
$57,073,589, $49,509,958 and $29,039,389 as of March 31, 1998, December 31,
1997 and March 31, 1997.
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 $74,493,758 as of March 31, 1998 compared with $71,472,338 as of December
31, 1997 and $52,048,449 as of March 31, 1997. The increase is a combination of
giving consideration for the increase in premium volume, increased retention on
all lines of coverages written and an increase in the IBNR reserves. Management
continues to closely monitor the reserve development trends and projections as
it attempts to stabilize the loss reserve development which has occurred in
recent years.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the Company's ability to meet obligations as they become
due. The obligations and cash outflow of the Company include claims settlements,
acquisition and administrative expenses, investment purchases and dividends to
shareholders. In addition to satisfying obligations and cash outflow through
premium collections, there is cash inflow obtained from interest and dividend
income, maturities and sales of investments. Because cash inflow from premiums
is received in advance of cash outflow required to settle claims, the Company
accumulates funds which it invests pending liquidity requirements. Therefore,
investments represent the majority (86.4%, 85.7% and 83.5% at each respective
period) of the Company's assets. Cash outflow can be unpredictable for two rea-
sons: first, a large portion of liabilities representing loss reserves have un-
certainty regarding settlement dates; and second, there is potential for losses
occurring either individually or in aggregate. As a result, the Company main-
tains adequate short-term investment programs necessary to ensure the availa-
bility of funds. The investment program is structured so that a forced sale li-
quidation of fixed maturities should not be necessary during the course of ordi-
nary business involvement and activities. The Company has no material capital
expenditure commitments.
YEAR 2000
A significant issue facing not only the insurance industry but society as a
whole is potential computer problems related to the approaching year 2000.
Older computer programs were written using two digits rather than four to
define the applicable year. As a result, those computer programs may mis-
interpret a date, using "00" as the year 1900 rather than the year 2000.
During 1996 and 1997 the Company incurred approximately $1.8 million of
expenses in updating its management information system to alleviate potential
year 2000 problems. This process is substantially completed, with only test-
ing and peripheral adjustments remaining. The additional expense for the
testing and adjustments is expected to be approximately $600,000. As a
result of these efforts, the Company is confident that the year 2000 will not
cause a significant disruption to its business.
The Company has also assessed the potential impact of year 2000 related
problems that may be encountered by our agents and third parties, and deter-
mined that any impact would not be material relative to the operations of
the Company. However, there can be no guarantee that actual results would
not differ materially from those anticipated.
12
INSURANCE SUBSIDIARY FINANCIAL STATEMENTS
Statutory Basis as Reported to State Regulatory Authorities
March 31, 1998, December 31, 1997 and March 31, 1997
CAPITOL INDEMNITY CORPORATION March 31, December 31, March 31,
Balance Sheets 1998 1997 1997
(Restated)
ASSETS
Cash and Invested Assets $ 236,067,041 $228,121,190 $174,757,224
Other Assets 19,729,181 21,344,680 20,344,456
Total Assets $ 255,796,222 $249,465,870 $195,101,680
LIABILITIES
Reserve for Losses and Loss Expenses $ 73,071,573 $ 71,117,787 $ 51,732,688
Unearned Premiums 44,792,563 46,667,861 42,041,642
Other Liabilities 17,865,273 22,356,111 18,939,091
Total Liabilities 135,729,409 140,141,759 112,713,421
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 120,066,813 109,324,111 82,388,259
Total Liabilities and Capital $ 255,796,222 $249,465,870 $195,101,680
Statements of Income
Premiums Earned $ 22,248,261 $ 87,304,679 $ 20,360,471
Underwriting Deductions 20,289,033 91,152,886 20,213,872
Net Underwriting Gain 1,959,228 (3,848,207) 146,599
Investment Income Including Sales 2,801,965 22,791,517 2,122,398
Other Income 24,247 28,708 5,366
Income Tax Expense 1,224,276 5,809,963 404,480
Net Income $ 3,561,164 $ 13,162,055 $ 1,869,883
CAPITOL SPECIALTY INSURANCE CORPORATION
Balance Sheets
ASSETS
Cash and Invested Assets $ 6,422,661 $ 6,353,535 $ 6,516,149
Other Assets 3,154,389 1,903,026 77,018
Total Assets $ 9,577,050 $ 8,256,561 $ 6,593,167
LIABILITIES
Reserve for Losses and Loss Expenses $ 358,154 $ - $ -
Unearned Premiums - - -
Other Liabilities 2,738,029 1,818,683 404,363
Total Liabilities 3,096,183 1,818,683 404,363
SURPLUS AS REGARDS POLICYHOLDERS
Shareholder's Equity 6,480,867 6,437,878 6,188,804
Total Liabilities and Capital $ 9,577,050 $ 8,256,561 $ 6,593,167
Statements of Income
Premiums Earned $ - $ - $ -
Underwriting Deductions 2,171 (3,719) 5,669
Net Underwriting (Loss) Gain (2,171) (3,719) (5,669)
Investment Income Including Sales 72,285 302,428 85,145
Other Income - - -
Income Tax Expense (Benefit) 1,250 9,111 (329)
Net Income $ 68,864 $ 297,036 $ 79,805
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 11, 1998,
both of which are dated April 6, 1998 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 Vice President
Capitol Transamerica Corporation American National Bank
Sun Prairie, Wisconsin Madison, Wisconsin
Larry Burcalow Reinhart H. Postweiler
Owner and President Retired, formerly with
Yahara Materials, Inc. Flad Affiliated Corp.
Middleton, Wisconsin Madison, Wisconsin
George A. Fait Kenneth P. Urso
Chairman of the Board Owner and Operator
and President Urso and Associates, LLC
Capitol Transamerica Corporation Middleton, Wisconsin
Madison, Wisconsin
Officers
George A. Fait Virgiline M. Schulte
Chairman of the Board and President Secretary
Paul J. Breitnauer Jane F. Endres
Vice President and Treasurer Assistant Secretary
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 6, 1998
17
CAPITOL TRANSAMERICA CORPORATION
FOR IMMEDIATE RELEASE Contact: Paul J. Breitnauer
Phone (608) 231-4450
NEWS RELEASE
FIRST QUARTER EARNINGS
Madison, Wisconsin, April 29, 1998 - Capitol Transamerica Corporation announced
first quarter 1998 earnings of $3.5 million ($.31 per share) compared with
restated first quarter earnings of $2.0 million ($.18 per share) for 1997, a
69.6% increase. Unless otherwise noted, all per share amounts are presented
on a diluted basis. Fourth quarter adjustments made in December 1997 for
certain revenues and expenses in 1997 have been restated, showing the re-
distribution by quarter for comparison purposes in 1998.
Premiums written increased 6.8% from $20.3 million for the first quarter of
1997 to $21.7 million for the first quarter of 1998. Premiums earned for the
first quarter increased from $20.4 million in 1997 to $22.2 million for the
like period in 1998, an increase of 9.3%.
Net investment income was $2.3 million compared with $2.1 million for the
first quarter of 1997, a 6.9% increase. Realized invstment gains were
$897,000 in 1998 and $346,000 in 1997. Total invested assets grew from $189.3
million at March 31, 1997 to $245.6 million at December 31, 1997 and $254.1
million at March 31, 1998, a total increase of 34.2% for the last twelve
months.
Shareholders' investment at March 31, 1998 was $147.1 million or $13.13 per
share compared with $114.7 million or $10.28 per share at March 31, 1997, an
increase of 28.3%. Cash dividends of $790,000 were paid in the first quarter
of 1998.
The Company's combined net loss, loss expense and general expense ratio for
the first quarter of 1998 was 93.6% compared with 98.1% for the restated re-
sults of the first quarter of 1997. The Company's experience continues to be
favorable compared to the commercial lines insurers industry average of 103.3%
for the year of 1997.
18
During the first quarter the company became licensed in the state of Maryland,
and has an application pending in one additional state. The Company is
striving toward completion of its program to become year 2000 compliant. An
analysis indicates that a substantial disruption of business due to internal
or external problems related to the year 2000 is unlikely. Management is opt-
imistic that despite the increased I.B.N.R. requirements in 1997, the Company's
sound business plan with prudent underwriting should assure continued value
and service to its shareholders, agents and policyholders.
The Annual Meeting of Shareholders is scheduled for May 11 at the Mariott Inn-
Madison West in Middleton, Wisconsin.
Capitol Transamerica Corporation is an insurance holding company operating a
national insurance business writing specialty lines of commercial property
and casualty policies as well as fidelity and surety coverages through its
subsidiary insurance companies Capitol Indemnity Corporation and Capitol
Specialty Insurance Corporation. A third subsidiary, Capitol Facilities
Corporation, provides premium financing for the insurance companies.
The Capitol Transamerica Group operates in 37 states and is rated A+ by A.M.
best Company, Inc., an independent organization that analyzes the insurance
industry.
Capitol Transamerica Corporation, with 11.2 million shares outstanding, is
traded on the National Over-the-Counter Stock Market under the symbol CATA.
FINANCIAL HIGHLIGHTS FOLLOW
19
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
(in thousands, except per share)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31,
1998 1997
(Restated)
REVENUES
Gross premiums written $ 21,675 $ 20,287
Net premiums written 20,373 19,847
Net premiums earned $ 22,248 $ 20,360
EXPENSES
Claims and claim expenses 13,063 12,838
Other underwriting expenses 7,724 7,548
Total Losses and Expenses Incurred 20,787 20,386
Underwriting income 1,461 (26)
Investment income 2,296 2,147
Realized investment gains 897 346
Other income 27 7
Income from Operations Before
Income Tax 4,681 2,474
Income tax expense 1,220 434
NET INCOME $ 3,461 $ 2,040
EARNINGS PER SHARE - BASIC $ 0.31 $ 0.18
EARNINGS PER SHARE - DILUTED $ 0.31 $ 0.18
COMPARATIVE FINANCIAL HIGHLIGHTS- Three Months Ended March 31,
1998 1997 1996 1995 1994
Per Share Information (Restated)
Income per share - diluted $ 0.31 $ 0.18 $ 0.30 $ 0.27 $ 0.24
Consolidated net income $ 3,641 $ 2,040 $ 3,280 $ 3,033 $ 2,629
Weighted average number
of shares outstanding
- diluted 11,264 11,251 11,058 11,123 10,962
Book value per share $ 13.13 $ 10.28 $ 8.56 $ 6.65 $ 5.83
Shareholders' investment $ 147,105 $ 114,669 $ 94,811 $ 73,434 $ 64,135
Dividends paid $ 790 $ 1,911 $ 1,476 $ 535 $ 1,335
Shares outstanding 11,200 11,150 11,073 11,040 11,010
Company Statistics:
Gross premiums written $ 21,675 $ 20,287 $ 18,877 $ 14,903 $ 13,665
Net investment income $ 2,296 $ 2,147 $ 1,710 $ 1,543 $ 1,237
Invested assets $ 254,056 $ 189,338 $ 151,217 $ 114,977 $ 93,760
Total assets $ 293,890 $ 226,628 $ 180,339 $ 137,306 $ 116,230
Insurance Operating Ratios,
Statutory Basis:
Loss and loss adjustment
expenses: 59.0% 61.4% 49.9% 50.4% 46.7%
Underwriting expenses 34.6% 36.7% 34.5% 33.8% 33.5%
Combined ratios 93.6% 98.1% 84.4% 84.2% 80.2%
20
CAPITOL TRANSAMERICA CORPORATION
SELECTED FINANCIAL DATA
BALANCE SHEETS
(in thousands, except per share)
March 31, March 31
1998 1997
ASSETS (Restated)
Investments
Available-for-sale investments at fair value
U.S. Government bonds (cost $67, and
$577, respectively) $ 71 $ 581
State and municipal bonds (cost $65,899,
and $67,547, respectively) 70,373 71,655
Corporate bonds (cost $817, and $889,
respectively) 869 956
Common stock (cost $111,774, and $76,702,
respectively) 162,179 100,797
Preferred stock (cost $6,197, and $5,929,
respectively) 8,336 6,695
Investment real estate 8,206 6,691
Short-term investments 4,022 1,963
Total Investments 254,056 189,338
Cash 690 990
Receivables 23,193 21,034
Other assets 15,951 15,266
TOTAL ASSETS $293,890 226,628
LIABILITIES
Reserves for losses and loss adjustment expenses $ 74,494 $ 52,048
Unearned premiums 45,487 42,470
Other liabilities 26,804 17,441
TOTAL LIABILITIES $146,785 $111,959
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value, authorized
15,000 shares, issued 11,524 and
11,466 shares, respectively $ 11,524 $ 11,466
Paid-in surplus 21,912 21,484
Unrealized appreciation on securities carried
at fair value, net of deferred taxes of
$19,405 and $9,873, respectively 37,669 19,166
Retained earnings 76,409 62,906
Less treasury stock, 324, and 316 shares,
respectively, at cost (409) (353)
TOTAL SHAREHOLDERS' EQUITY 147,105 114,669
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $293,890 $226,628
SHAREHOLDERS' EQUITY PER SHARE $ 13.13 $ 10.28
SHARES OUTSTANDING 11,199,986 11,149,659
Increase in Sharholders' Equity-
March 31, 1997 to March 31, 1998 28.3%
March 31, 1996 to March 31, 1997 23.0%
21