SECURITIES AND EXCHANGE COMMISSION Washington, D.C. FORM 10-Q ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended March 31, 1999 Commission file number: 0-2047 CAPITOL TRANSAMERICA CORPORATION (CTC) (Exact name of registrant as specified in its charter) A WISCONSIN CORPORATION 39-1052658 4610 University Avenue Madison, Wisconsin 53705-0900 Registrant's telephone number, including area code: (608) 231-4450 Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK, $1.00 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the regis- trant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Based on the closing average of the high (15) and low price (14 1/8), the aggregate market value of voting stock held by non-affiliates of the registrant as of March 31, 1999 was approximately $163,515,978. Indicate the number of shares of each of the issuer's class of common stock, as of the latest practicable date: At March 31, 1999 Common Stock, $1.00 Par Value; Issued: 11,535,761 Outstanding: 11,228,565 Total Pages: 21 Securities and Exchange Commission Washington, D.C. 20549 Form 10-Q Part I Financial Information Page Consolidated Financial Statements 3 - 7 Notes to Consolidated Financial Statements 8 - 9 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 12 Condensed Statutory Financial Statements of Insurance Subsidiaries 13 Part II Other Information Other Disclosures 15 Officers and Directors 16 Signatures 17 Exhibit 1 (Press Release) 18 - 21 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED BALANCE SHEETS March 31, December 31, March 31, 1999 1998 1998 ASSETS Investments: Available-for-sale investment securities, at fair value U.S. Government bonds (amortized cost $46,285, $51,204 and $65,765, respectively) $ 50,162 $ 55,350 $ 70,641 State, municipal and political subdivision bonds (amortized cost $71,264,659, $67,339,664 and $65,899,343, respectively) 77,268,888 74,182,001 70,772,667 Corporate bonds and notes (amortized cost $627,419, $819,678 and $817,442, respectively) 603,240 824,109 468,849 Equity securities: Common stock (cost $116,941,403, $115,583,088 and $111,773,734, respectively) 125,422,809 135,373,036 162,178,627 Nonredeemable preferred stock (cost $5,883,941, $6,769,703 and $6,197,248, respectively) 7,166,883 7,851,215 8,336,338 Investment real estate, at cost, net of depreciation 10,138,901 9,999,919 8,206,367 Short-term investments, at cost which approximates fair value 11,494,374 9,854,962 4,022,640 Total Investments 232,145,257 238,140,592 254,056,129 Cash 566,618 1,544,438 690,143 Accrued investment income 1,817,278 1,678,998 1,678,658 Receivables from agents, insureds and others, less allowance for doubtful accounts of $515,000, $500,000 and $455,000, respectively 16,040,124 17,217,646 20,227,064 Balances due from reinsurers 2,382,245 913,186 1,287,480 Funds held by ceding reinsurers 35,756 35,756 - Federal income taxes recoverable - 141,982 - Deferred insurance acquisition costs 13,853,454 13,524,777 13,617,162 Prepaid reinsurance premiums 803,043 727,074 694,821 Due from securities brokers 4,419,550 1,633,833 - Other assets 1,865,252 1,801,315 1,638,632 Total Assets $273,928,577 $277,359,597 $293,890,089 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED BALANCE SHEETS March 31, December 31, March 31, 1999 1998 1998 LIABILITIES Policy liabilities and accruals: Reserve for losses $ 59,014,448 $ 55,336,376 $ 51,751,775 Reserve for loss adjustment expenses 22,986,838 23,167,674 22,741,983 Unearned premiums 39,079,570 41,541,432 45,487,384 Total Policy Liabilities and Accruals 121,080,856 120,045,482 119,981,142 Accounts payable 3,238,492 3,340,980 2,411,527 Claim drafts outstanding 2,656,117 2,836,566 3,423,235 Due to securities brokers 2,152,923 231,185 - Balances due to reinsurers 1,610,379 1,038,967 1,945,913 Accrued premium taxes 178,155 237,171 260,447 Federal income taxes payable 1,404,733 - 616,227 State income taxes payable 76,097 91,444 115,178 Deferred income taxes 4,220,295 8,221,829 18,031,614 Total Other Liabilities 15,537,191 15,998,142 26,804,141 Total Liabilities 136,618,047 136,043,624 146,785,283 SHAREHOLDERS' INVESTMENT Common stock, $1.00 par value, authorized 15,000,000 shares, issued 11,535,761, 11,529,376 and 11,524,002, respectively 11,535,761 11,529,376 11,524,002 Paid-in surplus 22,278,651 22,246,366 21,912,129 Accumulated other comprehensive income, net of deferred taxes of $5,511,896, $9,702,829 and $19,405,021, respectively 10,236,379 18,019,545 37,668,568 Retained earnings 93,755,298 90,016,245 76,409,332 Shareholders' investment before treasury stock 137,806,089 141,811,532 147,514,031 Treasury stock, 307,196, 307,196 and 324,016 shares, respectively, at cost (495,559) (495,559) (409,225) Total Shareholders' Investment 137,310,530 141,315,973 147,104,806 Total Liabilities and Shareholders' Investment $273,928,577 $277,359,597 $293,890,089 Book Value Per Share $ 12.23 $ 12.59 $ 13.13 Shares Outstanding 11,228,565 11,222,180 11,199,986 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENTS OF INCOME For The Three Months Ended March 31, 1999 and 1998 1999 1998 REVENUES Premiums earned $ 20,511,600 $ 22,248,261 Net investment income 2,145,330 2,295,831 Realized investment gains 2,354,246 896,552 Other revenues 78,626 26,945 Total Revenues 25,089,802 25,467,589 LOSSES AND EXPENSES INCURRED Losses incurred 9,766,940 11,433,308 Loss adjustment expenses incurred 1,923,299 1,629,775 Underwriting, acquisition and insurance expenses 6,862,781 6,811,295 (Increase) decrease in deferred insurance acquisition costs (328,677) 569,779 Other expenses 326,398 343,168 Total Losses and Expenses Incurred 18,550,741 20,787,325 Income from operations before income taxes 6,539,061 4,680,264 Income tax expense (benefit) Current 1,824,610 1,417,023 Deferred 189,399 (197,300) 2,014,009 1,219,723 Net Income $ 4,525,052 $ 3,460,541 INCOME PER SHARE - BASIC $ 0.40 $ 0.31 Weighted Average Number of Shares Outstanding - Basic 11,216,162 11,168,127 INCOME PER SHARE - DILUTED $ 0.40 $ 0.31 Weighted Average Number of Shares Outstanding - Diluted 11,259,274 11,264,321 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS INVESTMENT AND COMPREHENSIVE INCOME Common Accumulated Common Stock Other Stock Distributable Compre- Compre- (Par Value (Par Value Paid-In hensive hensive Retained Treasury $1.00) $1.00) Surplus Income Income Earnings Stock Balance, January 1, 1997 $ 7,612,711 $ 3,806,355 $21,114,644 $ - $21,624,025 $62,761,654 $(337,506) Comprehensive income Net income - - - 15,191,879 - 15,191,879 - Other comprehensive income Unrealized appreciation on available-for-sale securities, net of deferred taxes - - - 21,197,000 - - - Less: reclassification adjustment, net of tax of $5,225,931, for gain included in net income - - - (10,144,453) - - - Other comprehensive income - - - 11,052,547 11,052,547 - - Comprehensive income - - - 26,244,426 - - - Stock options exercised 83,678 - 542,344 - - - (63,769) Purchases and sales of treasury stock, net - - 175,218 - - - - Stock dividend 3,806,131 (3,806,355) - - - - - Cash dividends declared - - - - - (4,221,415) - Balance, December 31, 1997 11,502,520 - 21,832,206 - 32,676,572 73,732,118 (401,275) Comprehensive income Net income - - - 19,423,913 - 19,423,913 - Other comprehensive income Unrealized depreciation on available-for-sale securities, net of deferred taxes - - - (6,078,237) - - - Less: reclassification adjustment, net of tax of $4,619,349, for gain included in net income - - - (8,578,790) - - - Other comprehensive income - - - (14,657,027) (14,657,027) - - Comprehensive income - - - 4,766,886 - - - Stock options exercised 26,856 - 142,409 - - - (18,952) Purchases and sales of treasury stock, net - - 271,751 - - - (75,332) Cash dividends declared - - - - - (3,139,786) - Balance, December 31, 1998 11,529,376 - 22,246,366 - 18,019,545 90,016,245 (495,559) Comprehensive income Net income - - - 4,525,052 - 4,525,052 - Other comprehensive income Unrealized depreciation on available-for-sale securities, net of deferred taxes - - - (6,252,906) - - - Less: reclassification adjustment, net of tax of $823,986, for gain included in net income - - - (1,530,260) - - - Other comprehensive income - - - (7,783,166) (7,783,166) - - Comprehensive income - - - (3,756,841) - - - Stock options exercised 6,385 - 32,285 - - - - Cash dividends declared - - - - - (785,999) - Balance, March 31, 1999 $11,535,761 $ - $22,278,651 $ - $10,236,379 $93,755,298 (495,559) CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS March 31, December 31, March 31, 1999 1998 1998 Cash flows provided by operating activities: Net Income $ 4,525,052 $ 19,423,913 $ 3,460,541 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 254,194 1,195,955 253,594 Realized investment gains (2,354,246) (13,198,139) (896,552) Change in: Deferred insurance acquisition costs (328,677) 662,164 569,779 Unearned premiums (2,461,862) (5,870,417) (1,924,465) Allowance for doubtful accounts receivable from agents 15,000 60,000 15,000 Accrued investment income (138,280) 28,694 29,034 Receivables from agents, insureds and others 1,162,522 3,542,835 578,417 Balances due to/from reinsurers 575,235 (191,361) 553,015 Reinsurance recoverable on paid and unpaid losses (1,472,882) (897,506) (1,109,230) Funds held by ceding reinsurers - (35,756) 43,235 Income taxes payable 1,531,368 633,804 1,415,747 Deferred income taxes 189,399 (304,896) (197,301) Due to/from securities brokers (863,979) (6,721,020) (5,318,372) Prepaid reinsurance premiums (75,969) 16,914 49,167 Other assets (85,247) (5,305) 23,908 Reserve for losses and loss adjustment expenses 3,497,236 7,031,712 3,021,420 Accounts payable (282,937) 371,977 29,194 Accrued premium taxes (59,016) (99,992) (76,716) Net cash provided by operating activities 3,626,911 5,643,576 519,415 Cash flows provided by (used for) investing activities: Proceeds from sales of available-for-sale investments 6,703,954 40,484,195 5,817,238 Purchases of available-for-sale investments (13,116,561) (49,573,482) (7,044,564) Maturities of available-for-sale investments 2,703,969 7,660,719 1,207,794 Purchase of depreciable assets (148,764) (1,080,065) (322,416) Net cash used for investing activities (3,857,402) (2,508,633) (341,948) Cash flows provided by (used for) financing activities: Cash dividends paid (785,999) (3,139,786) (783,327) Stock options exercised 38,670 441,017 101,405 Net proceeds from sale of treasury stock - (94,284) (7,950) Net cash used for financing activities (747,329) (2,793,053) (689,872) Net (decrease) increase in cash (977,820) 341,890 (512,405) Cash, beginning of period 1,544,438 1,202,548 1,202,548 Cash, end of period $ 566,618 $ 1,544,438 $ 690,143 Cash paid during the year for: Income taxes $ 858,200 $ 8,358,132 $ 1,100,781 CAPITOL TRANSAMERICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999 (1) Basis of Presentation The condensed financial statements included herein of Capitol Transamerica Corporation (the "Company"), other than the Consolidated Balance Sheet as of December 31, 1998, and the Consolidated Statement of Cash Flows as of December 31, 1998, have been prepared by the Compa- ny without audit, pursuant to the rules and regulations of the Securities Exchange Commission. Certain information and footnote dis- closures normally included in financial statements prepared in accor- dance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although the Company believes the disclosures are adequate to make the information presented not misleading, it is suggested that these con- densed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's 1998 annual report on Form 10-K. (2) Income Per Share Net income per share is computed by dividing net income by the weighted average number of shares of stock outstanding during the period. In 1997, the Financial Accounting Standards Board issued Statement of Financial Standards No. 128 (SFAS 128), "Earnings per Share," which re- places the presentation of primary and fully diluted earnings per share (EPS) with a presentation of basic and diluted EPS. The following table sets forth the computation of basic and diluted EPS: March 31, 1999 1998 Numerator: Consolidated net income $ 4,525,052 $ 3,460,541 Denominator: Denominator for basic EPS - weighted average shares 11,216,162 11,168,127 Effect of dilutive securities - employee stock options 43,112 96,194 Denominator for diluted EPS 11,259,274 11,264,321 (3) Income Taxes Deferred income taxes reflect the net tax effects of temporary differ- ences between the carrying amounts of assets and liabilities for finan- cial statement purposes and the amounts used for income taxes. (4) Common Stock Options There were 6,385 options exercised during the three months ended March 31, 1999 and there were 21,482 options exercised during the three months ended March 31, 1998. For further information regarding stock options, refer to Note 6 of Notes to Consolidated Financial Statements included in the Company's 1998 annual report. (5) Dividends 1999 On February 26, 1999 a cash dividend of $.07 per share was declared to shareholders of record March 12, 1999 and paid March 26 in the amount of $785,999. 1998 On October 21, 1998 a cash dividend of $.07 per share was declared to shareholders of record December 4, 1998 and paid December 18 in the amount of $785,669. On July 24, 1998 a cash dividend of $.07 per share was declared to shareholders of record September 11, 1998 and paid September 25 in the amount of $785,410. On April 29, 1998 a cash dividend of $.07 per share was declared to shareholders of record June 12, 1998 and paid June 26 in the amount of $785,191. On February 27, 1998 a cash dividend of $.07 per share was declared to shareholders of record March 13, 1998 and paid March 27 in the amount of $783,327. (6) Investments Fixed maturities and equity securities are classified as available-for- sale and, accordingly, are carried at fair value, with unrealized gains and losses reported as a separate component of shareholders' invest- ment, net of taxes. The cost of fixed maturities is adjusted for amor- tization of premiums and accretion of discounts to maturity. Fixed ma- turities and equity securities deemed to have declines in value that are other than temporary are written down through the statement of in- come to carrying values equal to their estimated fair values. Investment real estate is carried at cost net of accumulated deprecia- tion of $873,885, $789,597 and $512,533 as of March 31, 1999, December 31, 1998 and March 31, 1998, respectively. The real estate is de- preciated over the estimated useful life of the asset. Cost of investments sold is determined under the specific identifica- tion method. (7) Contingent Liabilities The Company is a defendant in certain lawsuits involving complaints which demand damages and recoveries for claims and losses alledgedly related to risks insured by the Company. In the opinion of management, such lawsuits are routine in that they result from the ordinary course of business in the insurance industry. The reserve for losses includes management's estimates of the probable ultimate cost of settling all losses involving lawsuits. (8) Industry Segment Disclosures Effective January 1, 1998, the Company adopted the Financial Accounting Standards Board's Statement of Financial Standards No. 131, "Disclo- sures about Segments of an Enterprise and Related Information." The adoption of SFAS No. 131 did not affect results of operations or finan- cial position, but did affect the disclosures of segment information. The Company has three business segments, which are segregated based on the types of products and services provided. The segments are (1) prop- erty and casualty, (2) fidelity and surety, and (3) discontinued re- insurance assumed operations. These segments constitute 100% of the operations of the Company. Data for each segment as required for in- terim reporting follows: Three Months Ended March 31, March 31, March 31, 1999 1998 1997 Total Revenues Property & Casualty $17,215,139 $17,253,335 $15,131,587 Fidelity & Surety 4,840,719 5,992,016 5,959,298 Reinsurance Assumed 171,186 110,136 76,866 Totals: $22,227,044 $23,355,487 $21,167,751 Before-tax Profit (Loss): Property & Casualty $ 4,684,629 $ 4,215,351 $ 1,038,979 Fidelity & Surety (1,078,525) (1,063,317) 1,357,335 Reinsurance Assumed 139,475 42,152 (1,312,433) Totals: $ 3,745,579 $ 3,194,186 $ 1,083,881 Reconciliation to Con- solidated GAAP: Capital and Surplus 2,327,809 1,718,987 1,320,484 Inter-company adjustments 465,673 (232,909) 69,977 Consolidated NIBT: $ 6,539,061 $ 4,680,264 $ 2,474,342 There has been no material change in the allocation of assets among the segments, and there has been no change in the method of measurement for the results of the segment operations. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Capitol Transamerica Corporation (the "Company") is an insurance holding company operating in 37 states which writes, through its insurance subsidiaries, both property-casualty and fidelity-surety insurance. The property-casualty segement accounts for approximately 75% of the business written while the fidelity-surety segment accounts for approximately 25% of the Company's business. The underwriting cylcles of the property-casualty insurance industry have been characterized by peak periods of adequate rates, underwriting profits and lower combined ratios, while the downward side of the cycle is characterized by inade- quate rates, underwriting losses and, as a result, higher combined ratios. The adequacy of premium rates is affected primarily by the severity and frequency of claims which in turn are affected by natural disasters, regulatory measures and court decisions which continue to uphold the "deep pocket" theory in awarding against insurance companies. Unfortunately for the insurance industry, the trend of increasing price competition has continued as has the number of significant natural disasters. This combination has resulted in considerable reduction in underwriting profitability for the industry as a whole. Adequate premium rates continue to be of concern to the Company and the property casulaty industry as a whole. Management feels strongly that rate reg- ulators have been slow to adjust rates in response to increased claim costs from the factors noted above. This, when combined with increased competition in the Company's niche market, has presented an unprecedented challenge to management. The Company has responded to this challenge with increased marketing efforts as well as the addition of innovative programs and alliances that should position the Company for continued expansion and profitability. OPERATING RESULTS As mentioned in the Overview section, the property-casualty insurance industry is in a downward cycle. Indeed, in the first quarter the Company saw a continu- ation of the decrease in premium writings that began in 1998. However, the in- creased claim activity that the Company experienced in 1997 has stabilized, as indicated by the decrease in the loss ratio. The expense portion of the com- bined ratio increased largely due to the decrease in the denominator, which is premiums written. Management believes the increased marketing efforts noted in the Overview will counter the difficult market conditions and restore the Company's trend of increasing underwriting profits. For the quarter ended March 31, 1999 gross premiums written totaled $19,335,808, down 10.8% over the $21,674,896 written in the first quarter of 1998. The new programs begun by the Company are just beginning to influence premium totals, and as they become fully implemented premium results should become much more favorable. Premiums earned are recognized as net revenues after reduction for reinsurance ceded and after establishment of the provision for the pro-rata unearned portion of premiums written. Net premiums earned totaled $20,511,600, $88,502,969 and $22,248,261 for the respective periods; and net unearned premiums were $39,079,570, $40,814,358 and $45,487,384 at each respective period. March 31, December 31, March 31, 1999 1998 1998 Gross Premiums Written $19,335,808 $87,802,645 $21,674,896 Reinsurance Ceded 1,362,039 5,153,179 1,301,933 Net Premiums Written $17,973,769 $82,649,466 $20,372,963 Net Premiums Earned $20,511,600 $88,502,969 $22,248,261 Net Unearned Premium Reserve $39,079,570 $40,814,358 $45,487,384 The Company's underwriting results can be measured by reference to the com- bined loss and expense ratios. This tabulation includes the operating results of the two subsidiary insurance companies on a statutory basis. Losses and loss adjustment expenses are stated as a ratio of net premiums earned, while underwriting expenses are stated as a ratio of net premiums written. The combined ratios were as follows: March 31, December 31, March 31, Insurance Operating Ratios (Statutory Basis): 1999 1998 1998 Loss and Loss Adjustment Expenses 57.2% 59.4% 59.0% Underwriting Expenses 39.4% 35.6% 34.6% Combined Ratios 96.6% 95.0% 93.6% The Company's combined ratio continues to compare favorably with the commercial lines industry average, which was 107.4% for the year 1998. REINSURANCE The Company follows the customary practice of reinsuring with other companies, e.g., ceding a portion of its exposure on the policies it has written. This pro- gram of reinsurance permits the Company greater diversification of business and the ability to write larger policies while limiting the extent of its maximum net loss. It provides protection for the Company against unusually serious oc- currences in which a number of claims could produce a large aggregate loss. Management continually monitors the Company's reinsurance program to obtain pro- tection that should be adequate to ensure the availability of funds for losses while maintaining future growth. NET INVESTMENT INCOME AND REALIZED GAINS The Company's fixed maturities and equity securites are classified as available-for-sale and are carried at fair value. The unrealized gains and losses, net of tax, are reported as a separate component of shareholders' investment. Interest and Dividend Income: Interest on fixed maturities is recorded as income when earned and is adjusted for any amortization of purchase premium or accre- tion of discount. Dividends on equity securities are recorded as income on ex- dividend dates. March 31, December 31, March 31, Investments: 1999 1998 1998 Invested Assets $ 232,145,257 $ 238,140,592 $ 254,056,129 Net Investment Income 2,145,330 9,119,936 2,295,831 Percent of Return to Average Carrying Value 4.0% 4.5% 4.7% Realized Gains 2,354,246 13,198,139 896,552 Change in Unrealized Gains $ (7,783,166) $(14,657,027) $ 7,563,631 The $7,783,166 decrease in unrealized gains for the first quarter of 1999 was composed of a $563,542 decrease in market value over cost of the Company's fixed maturities and a $7,219,624 decrease in market value over cost of the equity portfolio. Net investment income decreased by 6.5%, and the return on average carrying value also decreased slightly. Before-tax unrealized gains were $15,748,275, $27,722,374 and $57,073,589 as of March 31, 1999, December 31, 1998 and March 31, 1998. INCOME TAXES Income tax expense is based on income reported for financial statement purposes and tax laws and rates in effect for the years presented. Deferred federal in- come taxes arise from timing differences between the recognition of income de- termined for financial reporting purposes and income tax purposes. Such timing differences are related principally to the deferral of policy acquisition costs, the recognition of unearned premiums, and discounting the claims reserves for tax purposes. Deferred taxes are also provided on unrealized gains and losses. LOSS RESERVES Reserves for loss and loss adjustment expenses reflect the Company's best esti- mate of the liability for the ultimate cost of reported claims and incurred but not reported (IBNR) claims as of the end of each period. The estimates are based on past claim experience and consider current claim trends as well as social and economic conditions. The Company's reserve for losses and loss adjustment ex- enses were $82,001,286 as of March 31, 1999 compared with $78,504,050 as of De- cember 31, 1998 and $74,493,758 as of March 31, 1998. The increase is a combina- tion of giving consideration for increases in premium volume, increased reten- tion on all lines of coverages written and an increase in the IBNR reserves. Management continues to closely monitor the reserve development trends and pro- jections as it attempts to stabilize the loss reserve development which has occurred in recent years. LIQUIDITY AND CAPITAL RESOURCES Liquidity refers to the Company's ability to meet obligations as they become due. The obligations and cash outflow of the Company include claims settlements, acquisition and administrative expenses, investment purchases and dividends to shareholders. In addition to satisfying obligations and cash outflow through premium collections, there is cash inflow obtained from interest and dividend income, maturities and sales of investments. Because cash inflow from premiums is received in advance of cash outflow required to settle claims, the Company accumulates funds which it invests pending liquidity requirements. Therefore, investments represent the majority (84.7%, 85.9% and 86.4% at each respective period) of the Company's assets. Cash outflow can be unpredictable for two rea- sons: first, a large portion of liabilities representing loss reserves have un- certainty regarding settlement dates; and second, there is potential for losses occurring either individually or in aggregate. As a result, the Company main- tains adequate short-term investment programs necessary to ensure the availa- bility of funds. The investment program is structured so that a forced sale li- quidation of fixed maturities should not be necessary during the course of ordi- nary business involvement and activities. The Company has no material capital expenditure commitments. YEAR 2000 A significant issue facing not only the insurance industry but society as a whole is potential computer problems related to the approaching year 2000. Older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs may mis- interpret a date, using "00" as the year 1900 rather than the year 2000. Over the past three years the Company has incurred approximately $2.3 million of expenses in updating its management information system to alleviate potential year 2000 problems. This process is substantially completed, with only final testing and minor adjustments remaining. The additional expense for the testing and adjustments is expected to be less than $100,000. As a result of these efforts, the Company is confident that the year 2000 will not cause a significant disruption to its business. The Company has also assessed the potential impact of year 2000 related problems that may be encountered by our agents and third parties, and deter- mined that any impact would not be material relative to the operations of the Company. However, there can be no guarantee that actual results would not differ materially from those anticipated; therefore, the Company has de- veloped a contingency plan in the event of a worst-case scenario. INSURANCE SUBSIDIARY FINANCIAL STATEMENTS Statutory Basis as Reported to State Regulatory Authorities March 31, 1999, December 31, 1998 and March 31, 1998 CAPITOL INDEMNITY CORPORATION March 31, December 31, March 31, Balance Sheets 1999 1998 1998 ASSETS Cash and Invested Assets $ 212,767,561 $217,813,120 $236,067,041 Other Assets 22,306,767 19,542,328 19,729,181 Total Assets $ 235,074,328 $237,355,448 $255,796,222 LIABILITIES Reserve for Losses and Loss Expenses $ 79,058,797 $ 77,094,939 $ 73,071,573 Unearned Premiums 38,276,527 40,814,358 44,792,563 Other Liabilities 20,826,258 16,543,315 17,865,273 Total Liabilities 138,161,582 134,452,612 135,729,409 SURPLUS AS REGARDS POLICYHOLDERS Shareholder's Equity 96,912,746 102,902,836 120,066,813 Total Liabilities and Capital $ 235,074,328 $237,355,448 $255,796,222 Statements of Income Premiums Earned $ 20,511,600 $ 88,502,969 $ 22,248,261 Underwriting Deductions 18,814,344 82,659,222 20,289,033 Net Underwriting Gain 1,697,256 5,843,747 1,959,228 Investment Income Including Sales 4,297,147 20,967,446 2,801,965 Other Income 78,985 106,675 24,247 Income Tax Expense 1,812,901 7,866,629 1,224,276 Net Income $ 4,260,487 $ 19,051,239 $ 3,561,164 CAPITOL SPECIALTY INSURANCE CORPORATION Balance Sheets ASSETS Cash and Invested Assets $ 5,506,271 $ 5,732,082 $ 6,422,661 Other Assets 482,834 140,872 3,154,389 Total Assets $ 5,989,105 $ 5,872,954 $ 9,577,050 LIABILITIES Reserve for Losses and Loss Expenses $ 367,612 $ - $ 358,154 Unearned Premiums - - - Other Liabilities 8,610 7,709 2,738,029 Total Liabilities 376,222 7,709 3,096,183 SURPLUS AS REGARDS POLICYHOLDERS Shareholder's Equity 5,612,883 5,865,245 6,480,867 Total Liabilities and Capital $ 5,989,105 $ 5,872,954 $ 9,577,050 Statements of Income Premiums Earned $ - $ - $ - Underwriting Deductions 5,265 (1,216) 2,171 Net Underwriting (Loss) Gain (5,265) 1,216 (2,171) Investment Income Including Sales 68,293 600,404 72,285 Other Income - - - Income Tax Expense (Benefit) 2,311 122,601 1,250 Net Income $ 60,717 $ 479,019 $ 68,864 PART II Other Disclosures Item 1. Legal Proceedings Reference is made to footnote number 7 "Contingent Liabilities" on Page 9 of this report. Item 2. Changes in Securities NONE Item 3. Defaults Upon Senior Securities NONE Item 4. Submission of Matters to a Vote of Security Holders Reference is made to the Notice of Annual Meeting of Shareholders and Proxy Statement for the Annual Meeting of Shareholders which was held May 17, 1999, both of which are dated April 9, 1999 and previously filed with the Securities and Exchange Commission and are incorporated herein as an exhibit by reference. Item 5. Other Information NONE Item 6. Exhibits and Reports on Form 8-K NONE CAPITOL TRANSAMERICA CORPORATION Subsidiaries Capitol Indemnity Corporation Capitol Specialty Insurance Corporation Capitol Facilities Corporation Board of Directors Paul J. Breitnauer Michael J. Larson Vice President and Treasurer Retired, formerly with Capitol Transamerica Corporation American National Bank Sun Prairie, Wisconsin Madison, Wisconsin Larry Burcalow Reinhart H. Postweiler Owner and President Retired, formerly with Yahara Materials, Inc. Flad Affiliated Corp. Middleton, Wisconsin Madison, Wisconsin George A. Fait Kenneth P. Urso Chairman of the Board Owner and Operator and President Urso and Associates, LLC Capitol Transamerica Corporation Middleton, Wisconsin Madison, Wisconsin Officers George A. Fait Virgiline M. Schulte Chairman of the Board and President Secretary Paul J. Breitnauer Jane F. Endres Vice President and Treasurer Assistant Secretary SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the under- signed thereunto duly authorized. CAPITOL TRANSAMERICA CORPORATION George A. Fait Chairman of the Board and President Paul J. Breitnauer Vice President and Treasurer Date: May 6, 1999 CAPITOL TRANSAMERICA CORPORATION FOR IMMEDIATE RELEASE Contact: Paul J. Breitnauer Phone (608) 231-4450 CAPITOL TRANSAMERICA CORPORATION REPORTS FIRST QUARTER EARNINGS Madison, Wisconsin, April 28, 1999 - Capitol Transamerica Corporation today announced that net income for the first quarter ended March 31, 1999 was $4.5 million or $.40 per share. This represents a 30.8% increase over net income of $3.5 million or $.31 per share earned for the same period last year. Unless otherwise noted, all per share amounts are presented on a diluted basis. First quarter 1999 net income included after-tax realized investment gains of $1.5 million or $.14 per share compared with $583,000 or $.05 per share in 1998. Excluding after-tax realized investment gains, net income for the first quarter was $3.0 million or $.27 per share against $2.9 million or $.26 per share for the 1998 period. Market conditions continued to have a negative impact on the premium writ- ings for the entire insurance industry, as well as the Company. Capitol Trans- america had a 10.8% decrease in gross premiums written from $21.7 million in the first quarter of 1998 to $19.3 million this year. The Company has respond- ed by increasing marketing efforts and commission rates which, when combined with the lower premiums, has led to a higher expense ratio. Management is con- fident that these efforts, as well as the introduction of compatible new coverages, will reverse the recent decline in premium production, caused pri- marily by rate competition. Net investment income was relatively unchanged at $2.1 million for the first quarter of 1999 compared with $2.3 million last year. Total cash and invested assets decreased to $232.7 million at March 31, 1999 from $239.7 million at December 31, 1998, which was primarily due to a decrease in market value on certain stocks in the Company's equity portfolio. Shareholders' investment at March 31, 1999 was $137.3 million or $12.23 per share compared with $141.3 million or $12.59 per share at year-end 1998. The Company's combined net loss, loss expense and general expense ratio for the first quarter of 1999 was 96.6% compared with 93.6% for the first quarter of 1998. The Company's overall loss and expense ratio continues to be very favorable compared to the commercial lines insurers industry average of 107.4% for the year 1998. Commenting on the results, George A. Fait, Chairman, stated that "Despite a difficult quarter from a premium standpoint, the Company showed a respectable increase in earnings over the first quarter of 1998. The Company is introducing new programs which are compatible with Capitol Transamerica's history of strong underwriting gains. We are also expanding our existing coverages into new states, and applications are pending for admission into additional states." "The Company re-underwrote the entire surety book of business in late 1997 and during the year 1998." Fait continued. "The large increase in contract surety premiums written in 1995 and 1996 was leading to increased loss activity and by re-underwriting the surety book we should return to previous profit- ability levels of this business segment. We are optimistic that premiums will resume an upward trend, and that the Company will continue to benefit from the strong, consistent growth that it has had in the past." The Annual Meeting of Shareholders is scheduled for May 17 at the Mariott Inn Madison West in Middleton, Wisconsin. Capitol Transamerica Corporation is an insurance holding company operating a national insurance business writing specialty lines of commercial property and casualty policies as well as fidelity and surety coverages through its subsidiary insurance companies Capitol Indemnity Corporation and Capitol Specialty Insurance Corporation. A third subsidiary, Capitol Facilities Corporation, provides premium financing for the insurance companies. The Capitol Transamerica Group operates in 37 states and is rated A+ by A.M. Best Company, Inc., an independent organization that analyzes the insurance industry. Capitol Transamerica Corporation, with 11.2 million shares outstanding, is traded on the National Over-the-Counter Stock Market under the symbol CATA. FINANCIAL HIGHLIGHTS FOLLOW CAPITOL TRANSAMERICA CORPORATION SELECTED FINANCIAL DATA (in thousands, except per share) CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended March 31, 1999 1998 REVENUES Gross premiums written $ 19,336 $ 21,675 Net premiums written 17,974 20,373 Net premiums earned $ 20,512 $ 22,248 EXPENSES Claims and claim expenses 11,690 13,063 Other underwriting expenses 6,861 7,724 Total Losses and Expenses Incurred 18,551 20,787 Underwriting income 1,961 1,461 Investment income 2,145 2,296 Realized investment gains 2,354 897 Other income 79 27 Income from Operations Before Income Tax 6,539 4,681 Income tax expense 2,014 1,220 NET INCOME $ 4,525 $ 3,461 EARNINGS PER SHARE - BASIC $ 0.40 $ 0.31 EARNINGS PER SHARE - DILUTED $ 0.40 $ 0.31 COMPARATIVE FINANCIAL HIGHLIGHTS- Three Months Ended March 31, 1999 1998 1997 1996 1995 Per Share Information Income per share - diluted $ 0.40 $ 0.31 $ 0.18 $ 0.30 $ 0.27 Consolidated net income $ 4,525 $ 3,641 $ 2,040 $ 3,280 $ 3,033 Weighted average number of shares outstanding - diluted 11,259 11,264 11,251 11,058 11,123 Book value per share $ 12.23 $ 13.13 $ 10.28 $ 8.56 $ 6.65 Shareholders' investment $ 137,311 $ 147,105 $ 114,669 $ 94,811 $ 73,434 Dividends paid $ 792 $ 790 $ 1,911 $ 1,476 $ 535 Shares outstanding 11,229 11,200 11,150 11,073 11,040 Company Statistics: Gross premiums written $ 19,336 $ 21,675 $ 20,287 $ 18,877 $ 14,903 Net investment income $ 2,145 $ 2,296 $ 2,147 $ 1,710 $ 1,543 Invested assets $ 232,145 $ 254,056 $ 189,338 $ 151,217 $ 114,977 Total assets $ 273,929 $ 293,890 $ 226,628 $ 180,339 $ 137,306 Insurance Operating Ratios, Statutory Basis: Loss and loss adjustment expenses: 57.2% 59.0% 61.4% 49.9% 50.4% Underwriting expenses 39.4% 34.6% 36.7% 34.5% 33.8% Combined ratios 96.6% 93.6% 98.1% 84.4% 84.2% 20 CAPITOL TRANSAMERICA CORPORATION SELECTED FINANCIAL DATA BALANCE SHEETS (in thousands, except per share) March 31, March 31 1999 1998 ASSETS Investments Available-for-sale investments at fair value U.S. Government bonds (cost $46, and $66, respectively) $ 50 $ 71 State and municipal bonds (cost $71,265, and $65,899, respectively) 77,269 70,373 Corporate bonds (cost $627, and $817, respectively) 603 869 Common stock (cost $116,941, and $111,774, respectively) 125,423 162,179 Preferred stock (cost $5,884, and $6,197, respectively) 7,167 8,336 Investment real estate 10,139 8,206 Short-term investments 11,494 4,022 Total Investments 232,145 254,056 Cash 567 690 Receivables 24,659 23,193 Other assets 16,558 15,951 TOTAL ASSETS $273,929 293,890 LIABILITIES Reserves for losses and loss adjustment expenses $ 82,001 $ 74,494 Unearned premiums 39,080 45,487 Other liabilities 15,537 26,804 TOTAL LIABILITIES $136,618 $146,785 SHAREHOLDERS' EQUITY Common stock, $1.00 par value, authorized 15,000 shares, issued 11,536 and 11,524 shares, respectively $ 11,536 $ 11,524 Paid-in surplus 22,279 21,912 Unrealized appreciation on securities carried at fair value, net of deferred taxes of $5,512 and $19,405, respectively 10,236 37,669 Retained earnings 93,755 76,409 Less treasury stock, 307, and 324 shares, respectively, at cost (495) (409) TOTAL SHAREHOLDERS' EQUITY 137,311 147,105 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $273,929 $293,890 SHAREHOLDERS' EQUITY PER SHARE $ 12.23 $ 13.13 SHARES OUTSTANDING 11,229 11,200