SECURITIES AND EXCHANGE COMMISSION Washington, D.C. FORM 10-Q ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended June 30, 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 (13 1/4) and low price (12 7/8), the aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 1999 was approximately $147,216,674. Indicate the number of shares of each of the issuer's class of common stock, as of the latest practicable date: At June 30, 1999 Common Stock, $1.00 Par Value; Issued: 11,538,322 Outstanding: 11,270,176 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 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED BALANCE SHEETS June 30, December 31, June 30, 1999 1998 1998 ASSETS Investments: Available-for-sale investment securities, at fair value U.S. Government bonds (amortized cost $42,020, $51,204 and $54,012, respectively) $ 45,297 $ 55,350 $ 58,695 State, municipal and political subdivision bonds (amortized cost $73,514,131, $67,339,664 and $66,334,009, respectively) 78,690,577 74,182,001 70,602,600 Corporate bonds and notes (amortized cost $878,383, $819,678 and $818,174, respectively) 849,020 824,109 867,489 Equity securities: Common stock (cost $121,537,302, $115,583,088 and $110,607,273, respectively) 137,043,056 135,373,036 148,727,611 Nonredeemable preferred stock (cost $6,183,941, $6,769,703 and $6,269,703, respectively) 7,520,735 7,851,215 8,367,001 Investment real estate, at cost, net of depreciation 10,282,768 9,999,919 8,695,480 Short-term investments, at cost which approximates fair value 3,950,315 9,854,962 5,948,642 Total Investments 238,381,768 238,140,592 243,267,518 Cash 1,128,175 1,544,438 590,537 Accrued investment income 1,663,726 1,678,998 1,721,169 Receivables from agents, insureds and others, less allowance for doubtful accounts of $530,000, $500,000 and $470,000, respectively 19,424,051 17,217,646 21,621,406 Balances due from reinsurers 2,479,652 913,186 259,811 Funds held by ceding reinsurers 35,756 35,756 43,235 Deferred insurance acquisition costs 14,115,040 13,524,777 13,797,429 Prepaid reinsurance premiums 1,047,296 727,074 373,979 Due from securities brokers 4,218,511 1,633,833 5,211,626 Income taxes receivable - 141,982 - Other assets 2,234,599 1,801,315 2,054,910 Total Assets $284,728,574 $277,359,597 $288,941,620 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED BALANCE SHEETS June 30, December 31, June 30, 1999 1998 1998 LIABILITIES Policy liabilities and accruals: Reserve for losses $ 54,619,303 $ 55,336,376 $ 51,238,825 Reserve for loss adjustment expenses 23,120,951 23,167,674 23,125,685 Unearned premiums 42,363,069 41,541,432 46,264,452 Total Policy Liabilities and Accruals 120,103,323 120,045,482 120,628,962 Accounts payable 3,212,105 3,340,980 2,265,554 Claim drafts outstanding 3,002,366 2,836,566 3,516,495 Due to securities brokers 1,009,992 231,185 936,828 Balances due to reinsurers 1,513,791 1,038,967 669,888 Accrued premium taxes 225,008 237,171 176,335 Income taxes payable 1,621,060 91,444 1,497,986 Deferred income taxes 6,414,103 8,221,829 13,942,208 Total Other Liabilities 16,998,425 15,998,142 23,005,294 Total Liabilities 137,101,748 136,043,624 143,634,256 SHAREHOLDERS' INVESTMENT Common stock, $1.00 par value, authorized 15,000,000 shares, issued 11,538,322, 11,529,376 and 11,522,605, respectively 11,538,322 11,529,376 11,522,605 Paid-in surplus 22,589,189 22,246,366 22,136,114 Accumulated other comprehensive income, net of deferred taxes of $7,697,519, $9,702,829 and $15,143,679, respectively 14,295,389 18,019,545 29,396,546 Retained earnings 99,699,485 90,016,245 82,722,142 Shareholders' investment before treasury stock 148,122,385 141,811,532 145,777,407 Treasury stock, 268,146, 307,196 and 305,592 shares, respectively, at cost (495,559) (495,559) (470,043) Total Shareholders' Investment 147,626,826 141,315,973 145,307,364 Total Liabilities and Shareholders' Investment $284,728,574 $277,359,597 $288,941,620 Book Value Per Share $ 13.10 $ 12.59 $ 12.95 Shares Outstanding 11,270,176 11,222,180 11,217,013 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENTS OF INCOME For the Six Months For the Three Months Ended June 30 Ended June 30 1999 1998 1999 1998 REVENUES Premiums earned $ 41,516,233 $ 44,814,531 $ 21,004,633 $ 22,566,270 Net investment income 4,438,879 4,582,773 2,293,549 2,286,942 Realized investment gains 5,260,243 7,537,903 2,905,997 6,641,351 Other revenues 129,070 48,908 50,444 21,963 Total Revenues 51,344,425 56,984,115 26,254,623 31,516,526 LOSSES INCURRED AND EXPENSES Losses incurred 15,690,363 22,985,036 5,923,423 11,551,728 Loss adjustment expenses incurred 4,097,851 3,959,518 2,174,552 2,329,743 Underwriting, acquisition and insurance expenses 15,062,077 14,270,964 8,199,296 7,459,669 (Decrease) increase in deferred insurance acquisition costs (590,263) 389,512 (261,586) (180,267) Other expenses 670,716 687,184 344,318 344,016 Total Losses Incurred and Expenses 34,930,744 42,292,214 16,380,003 21,504,889 Income from operations before income taxes 16,413,681 14,691,901 9,874,620 10,011,637 Income tax expense (benefit) Current 4,958,648 4,330,445 3,134,038 2,913,422 Deferred 197,586 (131,442) 8,187 65,858 5,156,234 4,199,003 3,142,225 2,979,280 Net Income $ 11,257,447 $ 10,492,898 $ 6,732,395 $ 7,032,357 INCOME PER SHARE - BASIC $ 1.00 $ 0.94 $ 0.60 $ 0.63 Weighted Average Number of Shares Outstanding - Basic 11,230,192 11,179,758 11,230,192 11,179,758 INCOME PER SHARE - DILUTED $ 1.00 $ 0.93 $ 0.60 $ 0.63 Weighted Average Number of Shares Outstanding - Diluted 11,253,441 11,243,474 11,253,441 11,243,474 CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS INVESTMENT AND COMPREHENSIVE INCOME Accumu- Common lated 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 adjust- ment, net of tax of $5,225,931, for gain included in net income - - - (10,144,453) - - - Other comprehensive income - - - 11,052,547 11,052,547 - - Comprehensive income - - - 26,244,426 - - - Stock options exercised 83,678 - 542,344 - - - (63,769) Purchases and sales of treasury stock, net - - 175,218 - - - - Stock dividend 3,806,131 (3,806,355) - - - - - Cash dividends declared - - - - - (4,221,415) - Balance, December 31, 1997 $11,502,520 - $21,832,206 - $32,676,572 $73,732,118 $ (401,275) Comprehensive income Net income - - - 19,423,913 - 19,423,913 - Other comprehensive income Unrealized depreciation on available-for sale securities, net of deferred taxes - - - (6,078,237) - - - Less: reclassification adjust- ment, net of tax of $4,619,349, for gain included in net income - - - (8,578,790) - - - Other comprehensive 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) Compehensive income Net income - - - 11,257,447 - 11,257,447 - Other comprehensive income Unrealized depreciation on available-for sale securities, net of deferred taxes - - - (304,998) - - - Less: reclassification adjust- ment, net of tax of $1,841,085, for gain included in net income - - - (3,419,158) - - - Other comprehensive income - - - (3,724,156) (3,724,156) - - Comprehensive income - - - 7,533,291 - - - Stock options exercised 8,946 - 52,399 - - - - Purchases and sales of treasury stock, net - - 290,424 - - - - Cash dividend declared - - - - - (1,574,207) - Balance, June 30, 1999 $11,538,322 - $22,589,189 - $14,295,389 $99,699,485 $ (495,559) CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS June 30, December 31, June 30, 1999 1998 1998 Cash flows provided by operating activities: Net Income $11,257,447 $ 19,423,913 $ 10,492,898 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 534,004 1,195,955 547,904 Realized investment gains (5,260,243) (13,198,139) (7,537,903) Change in: Deferred insurance acquisition costs (590,263) 662,164 389,512 Unearned premiums 821,637 (5,870,417) (1,147,397) Allowance for doubtful accounts receivable from agents 30,000 60,000 30,000 Accrued investment income 15,272 28,694 (13,477) Receivables from agents, insureds and others (2,236,405) 3,542,835 (830,925) Balances due to/from reinsurers 391,207 (191,361) 112,629 Reinsurance recoverable on paid and unpaid losses (1,482,849) (897,506) (917,200) Funds held by ceding reinsurers - (35,756) (43,235) Income taxes payable 1,671,598 633,804 2,254,495 Deferred income taxes 197,584 (304,896) (131,445) Due to/from securities brokers (1,805,871) (6,721,020) (9,593,170) Prepaid reinsurance premiums (320,222) 16,914 370,009 Other assets (395,392) (5,305) (385,812) Reserve for losses and loss adjustment expenses (763,796) 7,031,712 2,892,172 Accounts payable 36,925 371,977 (23,518) Accrued premium taxes (12,163) (99,992) (160,828) Net cash provided by operating activities 2,088,470 5,643,576 (3,695,291) Cash flows provided by (used for) investing activities: Proceeds from sales of available-for-sale investments 20,543,045 40,484,195 25,093,983 Purchases of available-for-sale investments (26,506,213) (49,573,482) (22,412,160) Maturities of available-for-sale investments 5,078,478 7,660,719 2,201,620 Purchase of depreciable assets (397,605) (1,080,065) (486,682) Net cash used for investing activities (1,282,295) (2,508,633) (4,396,761) Cash flows provided by (used for) financing activities: Cash dividends paid (1,574,207) (3,139,786) (1,568,706) Stock options exercised 61,345 150,314 80,007 Net proceeds from sale of treasury stock 290,424 196,419 175,218 Net cash used for financing activities (1,222,438) (2,793,053 (1,313,481) Net (decrease) increase in cash (416,263) 341,890 (612,011) Cash, beginning of period 1,544,438 1,202,548 1,202,548 Cash, end of period $ 1,128,175 $ 1,544,438 $ 590,537 Cash paid during the year for: Income taxes $ 4,087,024 $ 8,358,132 $ 2,182,031 CAPITOL TRANSAMERICA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 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: June 30, Dec. 31, June 30, 1999 1998 1998 Numerator: Consolidated net income $11,257,447 $19,423,913 $10,492,898 Denominator: Denominator for basic EPS - weighted average shares 11,230,192 11,206,018 11,179,758 Effect of dilutive securities - employee stock options 23,249 74,424 63,716 Denominator for diluted EPS 11,253,441 11,280,442 11,243,474 (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 8,946 options exercised during the six months ended June 30, 1999 and there were 20,085 options exercised during the six months ended June 30, 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 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. 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, 1998 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 25,1998 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, 1998 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, 1998 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' investment net of taxes. The cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity. Fixed maturities and equity securities deemed to have declines in value that are other than temporary are written down through the statement of income to carrying values equal to their estimated fair values. Investment real estate is carried at cost net of accumulated deprecia- tion of $962,159, $789,597 and $606,799 as of June 30, 1999, December 31, 1998 and June 30, 1998, 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. (8) Industry Segment Disclosures Effective January 1, 1998 the Company adopted the Financial Accounting Standards Board's Statement of Financial Standards No. 131, "Dis- closures about Segments of an Enterprise and Related Information." The adoption of SFAS No. 131 did not affect results of 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: Year to Date June 30, December 31, June 30, 1999 1998 1998 Total Revenues: Property & Casualty $ 35,134,996 $ 72,420,673 $ 36,724,045 Fidelity & Surety 9,889,077 23,640,597 12,155,855 Reinsurance Assumed 424,566 824,414 449,051 Totals: $ 45,448,639 $ 96,885,684 $ 49,328,951 Before-tax Profit (Loss): Property & Casualty $ 9,711,547 $ 11,793,098 $ 8,027,555 Fidelity & Surety 244,328 2,582,866 (624,853) Reinsurance Assumed 174,292 410,173 117,132 Totals: $ 10,130,167 $ 14,786,137 $ 7,519,834 Reconciliation to Consolidated GAAP: Capital and Surplus 5,591,816 12,817,913 7,008,719 Inter-company Adjustments 691,698 396,938 (2,534,453) Consolidated net income before-tax:$ 16,413,681 $ 28,000,988 $ 11,994,100 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 award- ing against insurance companies. Unfortunately for the insurance industry, the trend of increasing price competition has continued as has the number of signi- ficant natural disasters. This combination has resulted in considerable reduct- ion in underwriting profitability for the industry as a whole. Adequate premium rates continue to be of concern to the Company and the proper- ty-casualty insurance industry as a whole. Mangement feels strongly that rate regulators have been slow to adjust rates in response to increased claim costs from the factors noted above. This, when combined with increased competition in the Companys' niche market, has presented an unprecedented challenge to manage- ment. The Company has responded to this challenge with increased marketing ef- forts as well as the addition of innovative programs and alliances that should position the Company for continued expansion and profitability. OPERATING RESULTS As mentioned in the Overview section, management belives that the property- casualty insurance industry is in a downward cycle. Indeed, in the first six months the Company saw a continuation of the decrease in premium writings that began in 1998. However, the increased claim activity that the Company experi- enced in 1997 has stabilized, as indicated by the decrease in the loss ratio. The expense portion of the combined 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 con- ditions and restore the Company's trend of increasing underwriting profits. For the six months ended June 30, 1999, gross premiums written totaled $44,658,675, down 3.9% over the $46,464,458 written in the first six months 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 be- come 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 $41,516,233, $88,629,476 and $44,814,531 for the respective periods, and net unearned premiums were $42,363,069, $41,541,432 and $46,264,452 at each respective period. June 30, December 31, June 30, 1999 1998 1998 Gross Premiums Written $44,658,675 $87,929,152 $46,464,458 Reinsurance Ceded 2,641,027 5,153,179 2,742,067 Net Premiums Written $42,017,648 $82,775,973 $43,722,391 Net Premiums Earned $41,516,233 $88,629,476 $44,814,531 Net Unearned Premium Reserve $42,363,069 $41,541,432 $46,264,452 The Company's underwriting results can be measured by reference to the combined loss and expense ratios. This tabulation includes the operating results of the two subsidiary insurance companies on a statutory basis. Losses and loss adjust- ment 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: June 30, December 31, June 30, Insurance Operating Ratios (Statutory Basis): 1999 1998 1998 Loss and Loss Adjustment Expenses 47.9% 59.4% 60.4% Underwriting Expenses 36.7% 35.6% 33.7% Combined Ratios 84.6% 95.0% 94.1% The Company's combined ratio continues to compare very favorably with the 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. June 30, December 31, June 30, Investments: 1999 1998 1998 Invested Assets $ 238,381,768 $ 238,140,592 $ 243,267,518 Net Investment Income 4,438,879 9,119,936 4,582,773 Percent of Return to Average Carrying Value 4.2% 4.5% 4.6% Realized Gains 5,260,243 13,198,139 7,537,903 Change in Unrealized Gains $ (5,729,466) $ (14,657,027) $ (4,969,733) The $5,729,466 decrease in unrealized gains for the six months of 1999 was com- posed of a $1,105,360 decrease in market value over cost of the Company's fixed maturities and a $4,624,106 decrease in market value over cost of the equity portfolio. Net investment income decreased 3.1%, and the return on average car- rying value also decreased slightly. Before-tax unrealized gains were $21,992,908, $27,722,374 and $44,540,225 as of June 30, 1999, December 31, 1998 and June 30, 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 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 so- cial and economic conditions. The Company's reserve for losses and loss adjust- ment expenses were $77,740,254 as of June 30, 1999 compared with $78,504,050 as of December 31, 1998 and $74,364,510 as of June 30, 1998. The overall increase is a combination of giving consideration for increases in premium volume, in- creased 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 (83.7%, 85.9% and 84.2% 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 ragher than four to define the applicable year. As a result, those computer programs may misinterpret 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 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 adjust- ments 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 determined that any impact would not be material relative to the operations of the Company. How- ever, there can be no guarantee that actual results would not differ materially from those anticipated; therefore, the Company has developed a contingency plan in the event of a worst-case scenario. INSURANCE SUBSIDIARY FINANCIAL STATEMENTS Statutory Basis as Reported to State Regulatory Authorities June 30, 1999, December 31, 1998 and June 30, 1998 CAPITOL INDEMNITY CORPORATION June 30, December 31, June 30, Balance Sheets 1999 1998 1998 ASSETS Cash and Invested Assets $220,168,054 $217,813,120 $225,435,791 Other Assets 24,231,724 19,542,328 27,037,916 Total Assets $244,399,778 $237,355,448 $252,473,707 LIABILITIES Reserve for Losses and Loss Expenses $ 74,883,066 $ 77,094,939 $ 73,220,681 Unearned Premiums 41,315,773 40,814,358 45,575,721 Other Liabilities 18,719,403 16,543,315 23,352,994 Total Liabilities 134,918,242 134,452,612 142,149,396 SURPLUS AS REGARDS POLICYHOLDERS Shareholder's Equity 109,481,536 102,902,836 110,324,311 Total Liabilities and Capital $244,399,778 $237,355,448 $252,473,707 Statements of Income Premiums Earned $ 41,516,233 $ 88,502,969 $ 44,814,531 Underwriting Deductions 35,678,044 82,659,222 42,118,515 Net Underwriting Gain 5,838,189 5,843,747 2,696,016 Investment Income Including Sales 9,395,688 20,967,446 11,478,355 Other Income 128,534 106,675 44,784 Income Tax Expense 4,637,377 7,866,629 3,902,675 Net Income $ 10,725,034 $ 19,051,239 $ 10,316,480 CAPITOL SPECIALTY INSURANCE CORPORATION Balance Sheets ASSETS Cash and Invested Assets $ 5,444,508 $ 5,732,082 $ 6,051,010 Other Assets 81,624 140,872 201,555 Total Assets $ 5,526,132 $ 5,872,954 $ 6,275,969 LIABILITIES Other Liabilities $ 193,046 $ 7,709 $ 382,199 Total Liabilities 193,046 7,709 382,199 SURPLUS AS REGARDS POLICYHOLDERS Shareholder's Equity 5,333,086 5,865,245 5,893,770 Total Liabilities and Capital $ 5,526,132 $ 5,872,954 $ 6,275,969 Statements of Income Underwriting Deductions 7,040 (1,216) 20,092 Net Underwriting (Loss) Gain (7,040) 1,216 (20,092) Investment Income Including Sales 813,810 600,404 472,329 Other Income - - 22,987 Income Tax Expense 244,097 122,601 116,706 Net Income $ 562,673 $ 479,019 $ 358,518 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 Item 7. Forward-looking Statements The Private Securities Litigation Reform Act of 1995 encourages corporations to provide investors with information about the company's anticipated performance and provides protection from liability if future results are not the same as managements ex- pectations. This document contains certain forward-looking state- ments that are based on assumptions which management believes are reasonable, but by their nature, inherently uncertain. Future results could differ materially from those projected. 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 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, 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: August 13, 1999 EXHIBIT I CAPITOL TRANSAMERICA CORPORATION ANNOUNCES RECORD SIX MONTHS EARNINGS FOR IMMEDIATE RELEASE Contact: Paul J. Breitnauer Phone (608) 231-4450 Madison, Wisconsin, July 28, 1999- George A. Fait, Chairman of Capitol Transamerica Corporation, announced that six months earnings were $11.3 million ($1.00 per share) compared with six months earnings of $10.5 million ($0.93 per share) in 1998. Six months income in 1999 included $3.5 million or $0.31 per share of after-tax realized investment gains while the six months income in 1998 included $5.0 million or $0.44 per share of after-tax realized gains. Excluding realized gains, net income for the six months of 1999 was $0.69 per share com- pared with $0.49 per share for the same period last year, a 40.8% increase. Un- less otherwise noted, all per share amounts are presented on a diluted basis. Second quarter 1999 earnings were $6.7 million or $0.60 per share compared with 1998 second quarter earnings of $7.0 million or $0.63 per share. Second quarter 1999 earnings included $0.17 per share of after-tax realized gains, whereas the second quarter of 1998 included $0.39 per share. Excluding net realized gains, second quarter 1999 and 1998 net income was $0.43 and $0.24 per share, respectively, a 79.2% increase. Six months gross premiums written for 1999 were $44.7 million compared with $46.5 million for the first six months of 1998. Gross premiums written for the second quarter increased from $24.8 million in 1998 to $25.3 million for the like period in 1999, an increase of 2.2%. Although market conditions con- tinue to adversely affect premium writings for the Company as well as the in- dustry as a whole, the implementation of new coverages and marketing efforts have begun to reverse the negative trend seen in 1998 and the first quarter of 1999. Net investment income for the first six months of 1999 was $4.4 million compared to $4.6 million for the same period of 1998. Net investment income for the second quarter was $2.3 million for both 1999 and 1998. Shareholders' investment continued its steady climb, increasing from $141.3 million ($12.59 per share) at December 31, 1998 to $147.6 million ($13.10 per share) at June 30, 1999, an increase of 4.5%. Unrealized investment gains were $22.0 million before tax and $14.3 million after tax at June 30, 1999. Total invested assets remained virtually unchanged in the first six months of 1999, reaching $238.4 million at June 30, 1999 versus $238.1 million at December 31, 1998. Cash dividends paid totaled $1.6 million or $0.14 per share. The Company's combined net loss, loss expense and general expense ratio for the first six months of 1999 was 84.6% compared with 94.1% for the like period in 1998. The Company's experience continues to be very favorable compared to the industry average of 104.2% for the first quarter of 1999 and 107.4% for the year of 1998. Fait reported that "The Company has turned in a solid six month performance and the outlook for the remainder of the year is positive and on track with fi- nancial goals. The combined ratio has lowered to a level more typical of the Company's operations, which has allowed us to show a substantial underwriting profit despite relatively flat premium writings. During the full year 1998 and the first six months of 1999, the Company did a complete re-underwriting of its entire book of business, which in turn caused our six month premium writings to be below initial projections. The second quarter started to show a substantial increase over the previous year, and with the implementation of our new products and marketing initiatives we are optimistic that this upward trend will continue for the rest of the year." 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. Capitol Transamerica Corporation, with 11.3 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 CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share) Six months ended Three months ended June 30, June 30, 1999 1998 1999 1998 REVENUES Gross premiums written $ 44,659 $ 44,464 $ 25,323 $ 24,789 Net premiums written 42,018 43,722 24,044 23,349 Net premiums earned $ 41,516 $ 44,814 $ 21,004 $ 22,566 EXPENSES Claims and claim expenses 19,788 26,944 8,098 13,881 Other underwriting expenses 15,143 15,348 8,282 7,624 Total Losses and Expenses Incurred 34,931 42,292 16,380 21,505 Underwriting income 6,585 2,522 4,624 1,061 Investment income 4,439 4,583 2,294 2,287 Realized investment gains 5,260 7,538 2,906 6,641 Other income 129 47 50 22 Income Before Income Tax 16,413 14,692 9,874 10,011 Income tax expense 5,156 4,199 3,142 2,979 NET INCOME $ 11,257 $ 10,493 $ 6,732 $ 7,032 EARNINGS PER SHARE- BASIC $ 1.00 $ 0.94 $ 0.60 $ 0.63 EARNINGS PER SHARE- DILUTED $ 1.00 $ 0.93 $ 0.60 $ 0.63 COMPARATIVE FINANCIAL HIGHLIGHTS- Six Months Ended June 30, 1999 1998 1997 1996 1995 Per Share Information Income per share-diluted $ 1.00 $ 0.93 $ 0.24 $ 0.67 $ 0.63 Consolidated net income $ 11,257 $ 10,493 $ 2,664 $ 7,432 $ 6,906 Weighted average number of shares outstanding- diluted 11,253 11,243 11,111 11,066 11,034 Book value per share $ 13.10 $ 12.95 $ 11.18 $ 8.89 $ 7.38 Shareholders' investment $ 147,627 $ 145,307 $ 124,692 $ 98,457 $ 81,595 Dividends paid $ 1,583 $ 1,581 $ 2,699 $ 2,222 $ 1,205 Shares outstanding 11,270 11,217 11,155 11,076 11,055 Company Statistics: Gross premiums written $ 44,659 $ 44,464 $ 47,449 $ 43,653 $ 33,930 Net investment income $ 4,439 $ 4,583 $ 4,120 $ 3,497 $ 3,112 Invested assets $ 238,382 $ 243,268 $ 208,402 $ 157,949 $ 123,889 Total assets $ 284,729 $ 288,942 $ 252,218 $ 191,135 $ 151,564 Insurance Operating Ratios, Statutory Basis: Loss and loss adjustment expenses: 47.9% 60.4% 61.9% 50.8% 51.1% Underwriting expenses 36.7% 33.7% 34.8% 32.2% 32.5% Combined ratios 84.6% 94.1% 96.7% 83.0% 83.6% 20 CAPITOL TRANSAMERICA CORPORATION SELECTED FINANCIAL DATA BALANCE SHEETS (in thousands, except per share) June 30, December 31, June 30 1999 1998 1998 ASSETS Investments Available-for-sale investments at fair value U.S. Government bonds (cost $42, $51 and $54, respectively) $ 45 $ 56 $ 59 State and municipal bonds (cost $73,514, $67,340 and $66,334, respectively) 78,691 74,182 70,603 Corporate bonds (cost $878, $820 and $818, respectively) 849 824 867 Common stock (cost $121,537, $115,583 and $110,607, respectively) 137,043 135,373 148,728 Preferred stock (cost $6,184, $6,770 and $6,270, respectively) 7,521 7,851 8,367 Investment real estate 10,283 10,000 8,695 Short-term investments 3,950 9,855 5,949 Total Investments 238,382 238,141 243,268 Cash 1,128 1,544 591 Due from securities brokers 4,219 1,634 5,212 Receivables 23,567 19,952 23,602 Other assets 17,433 16,089 16,239 TOTAL ASSETS $284,729 $277,360 $288,942 LIABILITIES Reserves for losses and loss adjustment expenses $ 77,740 $ 78,504 $ 74,365 Unearned premiums 42,363 41,542 46,264 Other liabilities 16,999 15,998 23,005 TOTAL LIABILITIES $137,102 $136,044 $143,634 SHAREHOLDERS' EQUITY Common stock, $1.00 par value, authorized 15,000 shares, issued 11,538, 11,529 and 11,523 shares, respectively $ 11,538 $ 11,529 $ 11,523 Paid-in surplus 22,589 22,246 22,202 Accumulated other comprehensive income, net of deferred taxes of $7,698, $9,703 and $15,144, respectively 14,295 18,020 29,397 Retained earnings 99,700 90,016 82,656 Less treasury stock, 268, 307, and 306 shares, respectively, at cost (495) (495) (470) TOTAL SHAREHOLDERS' EQUITY 147,627 141,316 145,308 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $284,729 $277,360 $288,942 SHAREHOLDERS' EQUITY PER SHARE $ 13.10 $ 12.59 $ 12.95 SHARES OUTSTANDING 11,270 11,222 11,217