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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
FORM 10-K/A
Amendment No. 2
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF l934
For the fiscal year ended December 31, 2000 Commission file number: 0-2047
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CAPITOL TRANSAMERICA CORPORATION
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(Exact name of registrant as specified in its charter)
A Wisconsin Corporation 39-1052658
- - ------------------------------------ ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
4610 University Avenue
Madison, Wisconsin 53705-0900
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(Address of principal executive offices) (Zip code)
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
-----------------------------
(Title of Class)
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 l934
during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES _X_ NO ___
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K. [ ].
Based on the closing average of the bid (13 1/4) and asked price (14), the
aggregate market value of voting stock held by non-affiliates of the registrant
as of March 9, 2001 was approximately $149,177,700.
Indicate the number of shares of each of the issuer's class of common stock, as
of the latest practicable date:
At March 9, 2001
Common Stock, $1.00 Par Value;
Issued: 11,560,189
Outstanding: 10,948,822
DOCUMENTS INCORPORATED BY REFERENCE
None.
Explanatory Note
----------------
This Amendment No. 2 to the Annual Report for the fiscal year ended December 31,
2000 of Capitol Transamerica Corporation (the "Company") is being filed by the
Company to amend and restate Item 1 of Part I, Items 6, 7 and 8 of Part II and
Item 14 of Part IV. In accordance with Rule 12b-15 promulgated under the
Securities Exchange Act of 1934, as amended, the text of the amended items is
amended and restated in its entirety as set forth in this Amendment No. 2.
Form 10-K (Annual Report)
-------------------------
Capitol Transamerica Corporation
--------------------------------
Part I
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Item 1. Business
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(a) General Development of Business
----------------------------------
Capitol Transamerica Corporation (CTC) is a holding company with
assets exceeding $283 million. CTC was formed in 1965 and owns 100% of
Capitol Indemnity Corporation (CIC), Capitol Specialty Insurance
Corporation (CSIC), and Capitol Facilities Corporation (CFC). Both CIC
and CSIC are property and casualty insurance companies. CIC writes a
complete portfolio of fidelity and surety bonds and specialty
insurance coverages, while CSIC has been largely inactive due to
market conditions. CIC operates on an admitted basis in thirty-six
states and on an excess/surplus lines basis in one state. CFC is a
non-insurance entity available for other business opportunities.
Some of the specialty property and casualty coverages written are:
Barber & Beauty Shops, Bowling Alleys, Contractors/Manufacturers, Day
Care Centers, Deer Hunters Accident, Detective/Guard Agencies,
Equipment Breakdown, Golf Courses, Nurses Professional,
Resorts/Campgrounds, Restaurants, Special Events, Clubs, Sportsman's
Accident, Tanning/Toning Salons and Taverns.
The full line of surety and fidelity bonds includes: Contractor's
Performance and Payment Bonds, License/Permit Bonds, Fiduciary Bonds,
Judicial Bonds and Commercial Fidelity Bonds.
The results of operations have remained most favorable since 1986 with
substantial increases in premium volume, profitability and
shareholders' investment.
(b) Information about Industry Segments
--------------------------------------
General:
-------
The subsidiaries of the Company, through licensed agents, are involved
only in the business of underwriting property, casualty, fidelity and
surety insurance on selected risks. The Company conducts business with
insurance agents located throughout the United States. As of December
31, 2000 and 1999, no amount due from agents located in any one state
exceeded 15% of total balances; no industry segment other than
insurance amounted to 10% or more of the Company's gross or net income
and no agent had writings in excess of 10% of the Company's gross
premiums in 2000, 1999 or 1998. During 2000, 1999 and 1998, direct
premiums written in Wisconsin accounted for approximately 19%, 19% and
17%, respectively, and direct premiums written in Illinois accounted
for approximately 14%, 14% and 14%, respectively, of the total direct
premiums written by the Company. No other state exceeded 10%.
(c) Narrative Description of Business
------------------------------------
Competitive Conditions:
-----------------------
All business written by the Company is highly competitive in the areas
of price, service and agent relationships. The large number of
insurers transacting business at rates which are independently
regulated by their respective insurance departments compete
aggressively for desirable business. Because of limitations in
capacity and other regulatory restrictions, companies the size of CIC
are sometimes at a disadvantage when competing with larger insurance
companies.
CIC is required by the Insurance Commissioner of the State of
Wisconsin to maintain a minimum compulsory surplus (surplus as regards
policyholders) of 25% of net premiums written during the preceding
twelve months. As of December 31, 2000, CIC reported $107.9 million in
surplus as regards policyholders, approximately $84.6 million in
excess of the required amount. In addition, CIC is required to report
a minimum 60% loss and loss expense ratio for the most current three
years on certain liability lines as well as a minimum 65% ratio on the
workers compensation line. Based upon actual historical experience,
the Company's ratios are substantially less than the requirement and
had the company not included the excess statutory reserves over
statement reserves in reporting to regulatory authorities, surplus
would have been $110.6 million at December 31, 2000.
Importance and Effect of Licenses:
-------------------------------------
Generally speaking, insurance companies must be licensed by the states
in which the insurance is written. Forms and rates for each policy
offered are filed with individual state insurance departments.
Number of Persons Employed:
-----------------------------
Capitol Transamerica Corporation and subsidiaries employ approximately
200 people.
2
Item 1(c). (continued)
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Information as to Similar Products or Services:
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Gross premiums written, reinsurance ceded and net premiums written for the
past five years are as follows:
2000
-------------------------------------
Gross Ceded Net
------------ ---------- -----------
Accident and Health $ 2,234,341 $1,940,917 $ 293,424
Burglary and Theft 13,838 - 13,838
Fidelity 1,315,459 87,659 1,227,800
Fire and Allied Lines 233,707 4,008 229,699
Inland Marine 1,067,314 802,577 264,737
Liability 10,841,327 265,893 10,575,434
Commercial Multiple Peril 60,080,487 3,926,534 56,153,953
Workers' Compensation 5,607,168 9,339 5,597,829
Surety 20,716,575 1,181,507 19,535,068
------------ ---------- -----------
$102,110,216 $8,218,434 $93,891,782
============ ========== ===========
1999
-------------------------------------
Gross Ceded Net
----------- ---------- -----------
Accident and Health $ 1,783,585 $1,493,857 $ 289,728
Burglary and Glass 8,043 - 8,043
Fidelity 1,529,920 77,098 1,452,822
Fire and Allied Lines 219,222 3,986 215,236
Inland Marine 523,766 383,631 140,135
Liability 8,086,932 163,639 7,923,293
Commercial Multiple Peril 50,787,804 2,734,476 48,053,328
Workers' Compensation 4,549,679 - 4,549,679
Surety 18,513,849 952,737 17,561,112
----------- ---------- -----------
$86,002,800 $5,809,424 $80,193,376
=========== ========== ===========
1998
-------------------------------------
Gross Ceded Net
----------- ---------- -----------
Accident and Health $ 1,884,645 $1,596,313 $ 288,332
Burglary and Glass 4,897 - 4,897
Fidelity 1,172,166 50,915 1,121,251
Fire and Allied Lines 319,109 5,621 313,488
Inland Marine 828,791 714,331 114,460
Liability 9,669,318 136,386 9,532,932
Commercial Multiple Peril 49,502,961 1,914,558 47,588,403
Workers' Compensation 4,059,756 - 4,059,756
Surety 20,487,509 735,055 19,752,454
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$87,929,152 $5,153,179 $82,775,973
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3
Item 1(c). (continued)
- -----------
1997
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Gross Ceded Net
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Accident and Health $ 5,090,314 $4,817,208 $ 273,106
Burglary and Glass 4,189 - 4,189
Fidelity 1,230,700 22,697 1,208,003
Fire and Allied Lines 424,516 4,296 420,220
Inland Marine 1,076,850 953,052 123,798
Liability 10,967,296 143,567 10,823,729
Commercial Multiple Peril 52,132,045 1,599,619 50,532,426
Workers' Compensation 3,381,685 - 3,381,685
Surety 25,200,251 402,612 24,797,639
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$99,507,846 $7,943,051 $91,564,795
=========== ========== ===========
1996
-------------------------------------
Gross Ceded Net
----------- ----------- -----------
Accident and Health $ 238,615 $ - $ 238,615
Burglary and Glass 32,189 - 32,189
Fidelity 1,317,643 25,958 1,291,685
Fire and Allied Lines 698,783 (271) 699,054
Inland Marine 987,201 2,802 984,399
Liability 13,048,828 130,503 12,918,325
Commercial Multiple Peril 48,790,958 1,027,117 47,763,841
Workers' Compensation 2,470,176 17,104 2,453,072
Surety 23,354,994 492,849 22,862,145
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$90,939,387 $1,696,062 $89,243,325
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4
(d) Discussion Topics
------------------
The following discussion topics, if applicable, have been included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and/or the Notes to Consolidated Financial Statements and the
accompanying Schedules which appear elsewhere in this Annual Report:
(1) Reinsurance transactions which have a material effect on earnings
or reserves.
(2) Significant reserving assumptions including any recent changes.
(3) The nature of recent changes in the terms under which reinsurance
is ceded to other insurers.
(4) Changes in the mix of business, including but not limited to
changes in the location of business, geographic mix and types of
risks assumed.
(5) Changes in payment patterns due to portfolio loss transfers,
structured settlements and other transactions and circumstances.
(6) Unusually large losses or gains.
(e) Reconciliation of Loss and Loss Adjustment Expense Reserves:
-------------------------------------------------------------------
2000 1999 1998
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Balances at January 1, $77,256,192 $78,504,050 $71,472,338
Reinsurance balances 121,478 (1,101,770) (594)
------------ ------------ ------------
Net reserves 77,377,670 77,402,280 71,471,744
Incurred losses and loss adjustment expenses related to:
Current year 60,051,007 47,749,455 49,862,090
Prior years:
Direct losses (net of recoveries) (1,744,893) (562,627) 4,091,923
Direct loss adjustment expenses (net of recoveries) 520,814 (2,379,899) (1,956,631)
Discontinued assumed reinsurance (1,325,553) 493,912 379,732
------------ ------------ ------------
Total prior years (2,549,632) (2,448,614) 2,515,024
Total incurred 57,501,375 45,300,841 52,377,114
------------ ------------ ------------
Paid losses and loss adjustment expenses related to:
Current year 25,045,636 18,642,962 20,035,517
Prior years 29,411,213 26,682,489 26,370,166
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Total paid 54,456,849 45,325,451 46,405,683
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Other adjustments, net - - (40,895)
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Net balance at December 31 80,422,196 77,377,670 77,402,280
Reinsurance balances (2,441,223) (121,478) 1,101,770
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Balances at December 31, $77,980,973 $77,256,192 $78,504,050
============ ============ ============
5
(f) Loss Reserve Development Consolidated (in millions of dollars)
Year ended: 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
------- ------- ------- ------- ------- ------- ------ ----- ----- -----
Reserves for losses and loss
adjustment expenses $ 14.5 $ 18.1 $ 19.3 $ 27.5 $ 38.5 $ 47.7 $71.5 $78.5 $77.3 $78.0
Re-estimated reserves:
One year later 19.5 21.2 25.5 33.8 43.4 65.8 75.1 74.9 73.3
Two years later 21.3 23.8 31.2 37.5 57.7 65.9 72.0 71.0 -
Three years later 22.7 28.3 33.5 51.4 56.2 65.6 67.0 - -
Four years later 25.9 30.7 43.6 48.2 54.4 60.9 - - -
Five years later 27.9 38.6 42.7 45.3 51.7 - - - -
Six years later 34.7 38.0 40.0 43.8 - - - - -
Seven years later 34.2 37.1 38.3 - - - - - -
Eight years later 34.2 35.3 - - - - - - -
Nine years later 32.6 - - - - - - - -
Cumulative (deficiency) redundancy (18.1) (17.2) (19.0) (16.3) (13.2) (13.2) 4.5 7.5 4.0
======= ======= ======= ======= ======= ======= ====== ===== =====
Cumulative (deficiency) redundancy
from discontinued reinsurance
assumed operations (12.2) (11.0) (10.0) (8.9) (8.0) (6.5) (5.2) 0.4 0.8
------- ------- ------- ------- ------- ------- ------ ----- -----
Cumulative (deficiency)
redundancy from
continuing operations (5.9) (6.2) (9.0) (7.4) (5.2) (6.7) 9.7 7.1 3.2
======= ======= ======= ======= ======= ======= ====== ===== =====
Cumulative amount of liability paid through:
One year later 7.6 9.4 9.9 12.2 16.2 21.2 26.4 26.7 29.1
Two years later 12.7 14.1 17.2 21.4 26.6 34.6 40.5 43.8 -
Three years later 15.4 18.9 23.6 27.5 34.2 44.3 50.0 - -
Four years later 18.7 23.0 27.0 31.7 38.4 48.9 - - -
Five years later 21.6 25.0 28.7 33.3 41.6 - - - -
Six years later 22.8 26.5 29.5 34.9 - - - - -
Seven years later 23.9 27.2 30.1 - - - - - -
Eight years later 24.5 27.3 - - - - - - -
Nine years later 24.6 - - - - - - - -
This table does not present accident or policy year development data, which
readers may be more accustomed to analyzing. Conditions and trends that have
affected development of the liability in the past may not necessarily occur in
the future. Accordingly, it may not be appropriate to extrapolate future
redundancies or deficiencies based on this table. There are no specific
provisions for the effects of inflation or other factors which may cause a
future change in claim costs.
The Company followed consistent reserving practices in conjunction with annual
independent actuarial reserve reviews throughout the ten-year period identified
in the table above.
The deficiencies in the early and mid-1990's were primarily due to two factors.
First, the continuing operations of the surety and fidelity bonds and property
and casualty insurance businesses had explosive growth, going from $12.9 million
in gross premiums written in 1985 to $32.7 million in 1991 and $102.1 million in
2000. With this growth came the development of losses over time. The Company
addressed these losses by establishing new underwriting standards in 1998 and
1999 and recording reserves using the Company's best estimate for losses and
loss adjustment expenses relating to liability for the ultimate cost of reported
claims and incurred but not reported claims. Second, along with the rest of the
insurance industry that wrote asbestos and environmental liability in the 1960's
and 1970's, the Company developed its reserves for potential asbestos and
environmental losses as these claims become more apparent from the ceding
companies. After consulting with its independent actuary, the Company
implemented a reserving methodology widely used to determine reserves for
asbestos and environmental claims.
6
The redundancies in recent years were primarily due to several factors. As
discussed above, the Company experienced significant growth from the early
1990's through the period ended December 31, 2000. Along with this growth, the
Company experienced a change in its mix of business, with surety and fidelity
bonds accounting for approximately 23.0% of the Company's gross written premiums
in 1997 compared to approximately 17.0% in 2000. The Company increased its
reserves in 1997 after giving consideration to the increased gross written
premium volume, different mix of business, increased retention of its business
and emerging claims experience and claim trends. Finally, the Company determined
that reserves for the discontinued reinsurance assumed needed to be increased
due to losses in the asbestos and environmental coverages, as discussed below.
Due to these factors, the Company increased its reserves from $47.7 million in
1996 to $71.5 million in 1997.
The insurance industry continues to have volatile results with respect to the
frequency and severity of losses that are paid in any given year. The
establishment of appropriate reserves, including reserves for catastrophes, is
an inherently uncertain process. Changes in prior year reserve estimates, which
may be material, are reflected in the results of operations in the period such
changes are determinable. The Company regularly updates its reserve estimates as
new facts become known and further events occur which may impact the resolution
of unsettled claims. The Company continues to record its best estimate of its
reserves utilizing consistent application of its reserving practices and
continues to closely monitor its loss trends as it develops its estimates of its
ultimate loss liability. These estimates can, and often do, vary from the actual
losses that are ultimately paid, resulting in the reserve deficiencies and
redundancies reflected in the above chart.
The Company was involved in providing reinsurance coverage by assuming a portion
of risks underwritten by other insurance companies and risk pools, including
asbestos and environmental risks. Although the Company withdrew from this
reinsurance business in 1976, liability remains for losses on policies written
during the period in which it participated as a reinsurer. The discontinued
reinsurance assumed loss reserves are based on current information available
from the ceding companies and are continually reviewed for accuracy and
reasonableness. Establishing net loss reserves for environmental and asbestos
claims is subject to uncertainties that are greater than those presented by
other types of claims. Among the complications are lack of historical data, long
reporting delays, uncertainty as to the number and identity of insureds with
potential exposure, unresolved legal issues regarding policy coverage,
availability of reinsurance and the extent and timing of any such contractual
liability. The legal issues concerning the interpretation of various insurance
policy provisions and whether those losses are, or were ever intended to be,
covered are complex. Courts have reached different and sometimes inconsistent
conclusions as to when losses are deemed to have occurred and which policies
provide coverage; what types of losses are covered; whether there is an insurer
obligation to defend; how policy limits are determined; how policy exclusions
and conditions are applied and interpreted; and whether clean-up costs represent
insured property damage. Management believes these issues are not likely to be
resolved in the near future. See also Note 4(b) of the Notes to the Consolidated
Financial Statements for more discussion of the Discontinued Reinsurance Assumed
Business.
(g) Reconciliation of Statutory to Generally Accepted Accounting Principles
(GAAP) reserves:
For the Year Ended December 31,
----------------------------------
2000 1999 1998
------------ ------------ ------------
Balance, December 31, as reported to the
Insurance Commissioner of the
State of Wisconsin:
- CIC $80,127,074 $77,044,646 $77,094,939
CSIC - - 367,612
Funds withheld from reinsurers, reclassified to
loss reserves on a GAAP basis 417,789 412,481 408,516
Reserve for return of disability premiums, reclassified
to loss reserves on a GAAP basis 3,369 19,517 24,064
GAAP adjustment to gross up reserves
for the effect of reinsurance (2,494,771) (185,866) 669,190
Other, net (72,488) (34,586) (60,271)
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Balance, December 31, on a GAAP basis $77,980,973 $77,256,192 $78,504,050
============ ============ ============
7
PART II
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Item 6. FIVE YEAR CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA:
- -------- --------------------------------------------------------------
2000 1999 1998 1997 1996
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Gross Premiums Written $102,110,215 $ 86,002,801 $ 87,929,152 $ 99,507,846 $ 90,939,387
============= ============= ============= ============= =============
Net Premiums Written $ 93,891,782 $ 80,193,376 $ 82,775,973 $ 91,564,795 $ 89,243,325
============= ============= ============= ============= =============
Premiums Earned $ 88,184,842 $ 82,841,104 $ 88,629,476 $ 87,451,620 $ 77,347,319
Net Investment Income 9,163,062 9,136,244 9,119,936 8,580,713 7,155,382
Realized Investment Gains 11,805,350 8,184,101 13,198,139 15,370,384 8,468,911
Other Revenues 355,208 249,672 113,005 36,801 382,130
------------- ------------- ------------- ------------- -------------
Total Revenues 109,508,462 100,411,121 111,060,556 111,439,518 93,353,742
------------- ------------- ------------- ------------- -------------
Losses and Loss Adjustment Expenses Incurred 57,501,375 45,300,841 52,377,114 61,128,402 41,165,776
Underwriting and Other Expenses 32,688,826 31,199,583 30,682,454 28,587,186 26,680,657
------------- ------------- ------------- ------------- -------------
Total Losses Incurred and Expenses 90,190,201 76,500,424 83,059,568 89,715,588 67,846,433
------------- ------------- ------------- ------------- -------------
Income from Operations Before Income Taxes 19,318,261 23,910,697 28,000,988 21,723,930 25,507,309
Income Tax Expense 4,864,944 7,198,234 8,577,075 6,532,051 7,158,151
------------- ------------- ------------- ------------- -------------
Consolidated Net Income $ 14,453,317 $ 16,712,463 $ 19,423,913 $ 15,191,879 $ 18,349,158
============= ============= ============= ============= =============
Weighted Average Number of Shares Outstanding- Basic 11,124,074 11,252,358 11,206,018 11,151,428 11,077,501
============= ============= ============= ============= =============
Weighted Average Number of Shares Outstanding- Diluted 11,158,462 11,297,289 11,280,442 11,285,751 11,315,758
============= ============= ============= ============= =============
Income Per Share - Basic $ 1.30 $ 1.49 $ 1.73 $ 1.36 $ 1.66
============= ============= ============= ============= =============
Income Per Share - Diluted $ 1.30 $ 1.48 $ 1.72 $ 1.35 $ 1.62
============= ============= ============= ============= =============
Total Cash Dividends Per Share $ 0.28 $ 0.28 $ 0.28 $ 0.38 $ 0.33
Consolidated Net Income and Cash Dividends Stated
as a Ratio to Beginning Shareholders' Equity 13.2% 14.1% 16.2% 16.7% 23.8%
Year End Financial Position:
Assets $283,258,052 $257,622,581 $277,359,597 $286,682,275 $228,885,454
Shareholders' Investment 145,699,869 133,226,210 141,315,973 139,342,141 116,581,883
Book Value Per Share $ 13.23 $ 11.82 $ 12.59 $ 12.46 $ 10.50
------------- ------------- ------------- ------------- -------------
Shares Outstanding 11,008,900 11,267,899 11,222,180 11,178,882 11,103,297
------------- ------------- ------------- ------------- -------------
Insurance Operating Ratios (GAAP Basis):
Losses and Loss Adjustment Expenses to
Net Premiums Earned 65.2% 54.7% 59.1% 69.9% 53.2%
Operating Expenses to Net Premiums Earned 36.7% 37.4% 34.5% 32.6% 34.0%
------------- ------------- ------------- ------------- -------------
Combined Ratio 101.9% 92.1% 93.6% 102.5% 87.2%
============= ============= ============= ============= =============
A. M. BEST Rating A+ A+ A+ A+ A+
Superior Superior Superior Superior Superior
============= ============= ============= ============= =============
8
Item 7. Management's Discussion and Analysis of Financial Condition and
- -------- -------------------------------------------------------------------
Results of Operations
-----------------------
OVERVIEW
Capitol Transamerica Corporation (the "Company") is an insurance holding company
operating in 37 states which writes, through its subsidiaries, both
property-casualty and fidelity-surety insurance. The property-casualty segment
accounts for approximately 77% of the business written in 2000 while the
fidelity-surety segment accounts for approximately 23% of the Company's business
written in 2000.
The underwriting cycles of the property-casualty insurance industry have been
characterized by peak periods of adequate rates, underwriting profits and lower
combined ratios, while the downward side of the cycle is characterized by
inadequate rates, underwriting losses and, as a result, higher combined ratios.
The adequacy of premium rates is affected primarily by the severity and
frequency of claims which, in turn, are affected by natural disasters,
regulatory measures and court decisions which continue to uphold the "deep
pocket" theory in awarding against insurance companies. Unfortunately for the
insurance industry, the trend of increasing price competition has continued as
has the number of significant natural disasters. This combination has resulted
in a considerable reduction in underwriting profitability for the industry as a
whole.
Adequate premium rates continue to be of concern to the Company and the
property-casualty insurance industry as a whole. Management feels strongly that
rate regulators have been slow to adjust rates in response to increased claim
costs from the factors noted above. This, when combined with increased
competition in the Companys' 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
Total revenues increased by approximately $9.1 million, or 9%, in 2000 compared
to 1999 due primarily to higher earned premiums and increases in realized
investment gains. Total revenues decreased by approximately $10.6 million, or
9.6%, in 1999 compared to 1998 due to lower earned premiums and decreases in
realized investment gains. Underwriting income decreased by $8.3 million in 2000
compared to 1999 due primarily to larger than expected losses on a few specific
claims as well as a $6.9 million reserve strengthening for increased premium
volume. Underwriting income increased by approximately $770,000 in 1999 compared
to 1998 due primarily to decreased loss and loss adjustment expenses. Net income
decreased to $14.5 million in 2000 from $16.7 million in 1999 and $19.4 million
in 1998. A more detailed analysis of the Company's results of operations
follows.
9
Premiums written are earned and recognized as revenues after a reduction for
reinsurance ceded and after establishing a provision for the pro rata unearned
portion of the premiums written. The following table illustrates the premiums
for 1998 through 2000.
2000 1999 1998
------------------------------ --------------- -------------- --------------
Gross Premiums Written $102,110,215 $86,002,801 $87,929,152
Reinsurance Ceded 8,218,433 5,809,425 5,153,179
------------------------------ --------------- -------------- --------------
Net Premiums Written $93,891,782 $80,193,376 $82,775,973
============================== =============== ============== ==============
Net Premiums Earned $88,184,842 $82,841,104 $88,629,476
============================== =============== ============== ==============
Net Unearned Premium Reserve $45,587,586 $39,454,257 $41,541,432
============================== =============== ============== ==============
Gross premiums written increased by $16.1 million, or approximately 18.7%, in
2000 compared to 1999 and decreased by $1.9 million, or approximately 2.2%, in
1999 compared to 1998. In 1998 and 1999, the Company established new
underwriting standards. With new underwriting standards in place, the Company
began to increase the gross premiums written in late 1999 and throughout 2000.
The fidelity-surety gross premiums written in 2000 grew by approximately 11%
compared to 1999 due primarily to volume increases. The property-casualty gross
premiums written in 2000 grew by approximately 21% compared to 1999 due
primarily to volume increases and to a lesser extent rate increases.
The Company's loss and loss adjustment expense levels on a GAAP basis increased
to approximately 65.2% of net premiums earned in 2000 compared to approximately
54.7% and 59.1% in 1999 and 1998, respectively. The increase in loss and loss
adjustment expenses in 2000 was due primarily to $8.1 million in unexpected
losses and $6.9 million in reserve strengthening, both of which are described in
more detail below. The Company sustained higher than expected losses on a select
group of seven claims in 2000. On the property-casualty side, there were two
casualty claims with net incurred losses (after reinsurance) of $3 million and
one property claim with net incurred losses of $1 million. On the
fidelity-surety side, there were four claims with incurred losses of $4.1
million. The Company took steps to improve its fidelity surety business
including not writing new bonds with certain bondholders and canceling certain
agents responsible for the production of unprofitable business. Had these losses
not occurred, the Company's loss and loss adjustment expense ratio for 2000
would have been approximately 55.5%, a level consistent with the Company's
history.
After detailed discussions internally and consultations with our independent
actuary, management believed it prudent to increase incurred but not reported
("IBNR") reserves in 2000 to address the losses inherent in the insurance
business as determined through an actuarial analysis as follows:
IBNR Reserve
---------------------------------------------------------------
Prior to Change After Change Change
---------------------------------------------------------------
Fidelity & Surety $4,951,626 $5,914,404 $962,778
Other Liability 6,687,385 8,130,557 1,443,172
Special Property 121,997 14,617 (107,380)
Commercial Multiple Peril 22,580,923 25,735,155 3,154,232
Workers Compensation 2,351,321 3,298,398 947,077
Reinsurance Assumed 2,600,000 3,100,000 500,000
All Other (Primarily Accident and
Health) 6,748 6,869 121
---------------------------------------------------------------
Total $39,300,000 $46,200,000 $6,900,000
===============================================================
10
The Company's operating expenses increased throughout the early and mid-1990's
due to explosive premium growth, which, in turn, caused a need for more
resources. When the Company established new underwriting standards in 1998 and
1999, the expenses remained at a level consistent with the 1997 level for two
reasons. First, fixed expenses will not fluctuate with the premium volume and,
second, resource levels, specifically staffing levels, were kept constant in
anticipation of future growth. This resulted in the operating expense ratio
growing from 32.6% in 1997 to 34.5% in 1998 and 37.4% in 1999. Conversely, the
ratio decreased to 36.7% in 2000 because the fixed assets have remained constant
and the Company has been able to effectively handle the increased premium volume
with essentially the same staffing levels.
The Company's operating results from underwriting operations can be measured by
the combined loss and operating expense ratios determined in accordance with
generally accepted accounting principles ("GAAP"). Under GAAP, the loss, loss
adjustment expenses and operating expenses are all stated as a ratio of net
premiums earned. The combined ratio is useful because it shows the operating
profitability of the Company excluding income from investment-related
activities. Alternately stated, it shows the profitability of the insurance
operations.
A combined ratio greater than 100% means the Company's insurance operations are
operating at a loss, which the Company believes is typical on average for the
insurance industry in recent years. This, however, does not mean the Company is
losing money, because investment income and realized investment gains are also
included in the determination of net income. Conversely, if the Company's
combined ratio is less than 100%, the insurance operations are operating at a
gain. The combined ratio should not be considered in isolation from or as a
substitute for net income, cash flows from operating activities or other
combined income or cash flow data prepared in accordance with GAAP or as a
measure of overall profitability or liquidity. The following table depicts the
Company's combined ratios for 1998 through 2000 broken down into its loss and
operating expense components on a GAAP basis.
2000 1999 1998
-----------------------------------------------------------------------------
Loss & Loss Adjustment Exp. 65.2% 54.7% 59.1%
Operating Expenses 36.7% 37.4% 34.5%
-----------------------------------------------------------------------------
Combined Ratio 101.9% 92.1% 93.6%
=============================================================================
Net investment income in 2000 amounted to $9,163,062 compared with $9,136,244
and $9,119,936 in 1999 and 1998, respectively. The Company holds a large
percentage of equity investments, which results in a comparatively lower rate of
return on invested assets. Investment income has been increasing due to the
Company concentrating investing in the fixed maturities market, most notably in
tax-exempt municipal bonds. The relationship of the increase in investment in
fixed maturities and net investment income is illustrated in the table below.
2000 1999 1998
- --------------------------------------------------------------------------------
Fixed Maturities (at amortized cost) $85,369,980 $80,019,257 $68,210,546
Net Investment Income 9,163,062 9,136,244 9,119,936
- --------------------------------------------------------------------------------
Realized investment gains fluctuate due to both market conditions and the extent
of specific investments that the Company decides to sell. The Company's realized
investment gains fluctuated from $13.2 million in 1998 to $8.2 million in 1999
and $11.8 million in 2000.
The Company's income tax expense has decreased from $8.6 million in 1998 to $7.2
million in 1999 to $4.5 million in 2000 for two reasons. First, income from
underwriting operations has decreased for those periods and, second, the
Company's increased investment in municipal bonds has decreased the amount of
taxable income.
11
During the year, the Company continued the program of purchasing treasury stock
for contingent commission payments. Under this program, the Company distributes
shares of stock as additional compensation to agents based on achievement of
premium growth and loss ratio targets for the agent's business in the prior
year.
REINSURANCE
The Company follows the customary practice of reinsuring with other companies,
i.e., ceding a portion of its exposure on the policies it has written. This
program 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 occurrences in which a number of claims could produce a large aggregate
loss. Management continually monitors the Company's reinsurance program to
obtain protection that management believes should be adequate to ensure the
availability of funds for losses while maintaining future growth.
NET INVESTMENT INCOME AND REALIZED GAINS
The Company's fixed maturities and equity securities are classified as
available-for-sale and are carried at fair value. The unrealized gains and
losses, net of tax, are reported as "Accumulated Other Comprehensive Income
(Loss)" in the equity portion of the balance sheet.
Interest and Dividend Income: Interest on fixed maturities is recorded as income
when earned and is adjusted for any amortization of purchase premium or
accretion of discount. Dividends on equity securities are recorded as income on
ex-dividend dates.
Investments: 2000 1999 1998
- --------------------------------------------------------------------------------
Invested Assets 232,367,776 $218,085,184 $238,140,592
Net Investment Income 9,163,062 9,136,244 9,119,936
Percent of Return to
Average Carrying Value 4.0% 4.2% 4.5%
Realized Gains 11,805,350 8,184,101 13,198,139
Change in Unrealized Gains 4,239,902 $(21,981,943) $(14,657,027)
- --------------------------------------------------------------------------------
The net unrealized gain of $4,239,902 for 2000 was comprised of a $1,482,391
unrealized gain on fixed maturities and a $2,757,511 unrealized gain on the
Company's equity portfolio. Management has begun to gradually increase its
tax-free bond holdings and de-emphasize the equity portfolio, but is optimistic
that the recent downturn in the value of its equity investments is temporary and
that the current market conditions provide an even greater opportunity to invest
and build shareholder value over the long term. This appears to be coming to
fruition, as evidenced by the current year's increase in unrealized gains.
12
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
income taxes arise from timing differences between the recognition of income
determined for financial reporting purposes and income tax purposes. Such timing
differences are related principally to the deferral of policy acquisition costs,
the recognition of unearned premiums and discounting of claims reserves for tax
purposes. Deferred taxes are also provided on unrealized gains and losses.
LOSS RESERVES
Reserves for losses and loss adjustment expenses reflect the Company's best
estimate of the liability for the ultimate cost of reported claims and incurred
but not reported (IBNR) claims at 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 reserves for losses and loss
adjustment expenses were $77,980,973 as of December 31, 2000, compared with
$77,256,192 as of December 31, 1999 and $78,504,050 as of December 31, 1998.
Management continues to closely monitor the reserves for losses and loss
adjustment expenses to assure adequate recognition of the ultimate liability for
claims and claim expenses. The establishment of appropriate reserves, including
reserves for catastrophes, is an inherently uncertain process. The Company
regularly updates its reserve estimates as new facts become known and further
events occur which may impact the resolution of unsettled claims. Changes in
prior year reserve estimates, which may be material, are reflected in the
results of operations in the period such changes are determinable.
13
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 claim 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 (82.0% in 2000, 84.7% in 1999 and 85.9% in
1998) of the Company's assets. Cash outflow can be unpredictable for two
reasons: first, a large portion of liabilities representing loss reserves have
uncertainty regarding settlement dates; and second, there is potential for
losses occurring either individually or in the aggregate. As a result, the
Company maintains adequate short-term investment programs necessary to ensure
the availability of funds. The investment program is structured so that a forced
sale liquidation of fixed maturities should not be necessary during the ordinary
course of business. The Company has no material capital expenditure commitments.
MARKET RISK
Market risk is defined as exposure to adverse fluctuations in interest rates,
foreign currency exchange rates, and commodity or other price changes. The
Company does not invest in derivatives or similar financial instruments, which
are highly sensitive to market risk and which are the main focus of the new
requirements. However, the requirements are broad enough in scope to encompass
the potential impact of interest rate fluctuations on the Company's fixed income
portfolio, as well as the potential impact of a severe drop in the stock market
on the Company's equity investments.
The following table shows the interest rate sensitivity of the Company's fixed
income investments (bonds and preferred stock) by presenting the projected
impact of a parallel rise or decline in interest rates of 100 and 200 basis
points. The interest rate fluctuation is assumed to occur on January 1, 2001 and
remain in effect for the life of the fixed income portfolio.
Basis Point (Decrease) Increase
Current
Portfolio Characteristics (200) (100) Market Rate 100 200
- - -----------------------------------------------------------------------------------
Market Value ($000's) $105,278 $101,203 $ 96,358 $90,834 $85,231
Market/Statement Value (%) 115.9% 111.4% 106.1% 100.0% 93.8%
Effective Duration (years) 3.9 4.2 4.5 4.8 5.0
The valuation of the Company's common stock portfolio is subject to equity price
risk. If market prices were to decrease 10%, the fair value of the common stock
portfolio would decrease by an estimated $9.0 million, from $119.4 million to
$110.4 million.
The Company's investment portfolio is actively managed to minimize downward
price risk.
14
SEGMENT INFORMATION
The Company has three business segments, which are segregated based on the types
of products and services provided. The segments are 1) property and casualty, 2)
fidelity and surety, and 3) reinsurance assumed operations. These segments
constitute 100% of the operations of the Company. The Company maintains and
monitors its segment information on a statutory basis. Financial data by
segment, including a reconciliation to consolidated GAAP basis, for 1998 through
2000 is in footnote 13 to the Financial Statements.
The property and casualty segment provides specialty commercial coverages for
beauty and barber shops, bowling alleys, contractors/manufacturers, day care
centers, restaurants, detective/guard agencies, golf courses and taverns. This
segment also provides nurses professional, deerhunters and sportsmen's accident,
and special event coverages. The fidelity and surety segment offers a full range
of surety and fidelity bonds, including contractor's payment and performance
bonds, license/permit bonds, fiduciary and judicial bonds, as well as commercial
fidelity bonds. The reinsurance assumed segment consists of active reinsurance
assumed and discontinued reinsurance assumed. The Company's discontinued
reinsurance assumed business involved providing reinsurance coverage by assuming
a portion of the risks underwritten by other insurance companies and risk pools,
including asbestos and environmental risks. Although the Company withdrew from
this reinsurance business in 1976, liability remains for losses on policies
written during the period in which it participated as a reinsurer.
The Operating Results section discussed the premium growth as well as the loss
and loss adjustment expenses for the fidelity-surety and property-casualty lines
of business. Discontinued reinsurance assumed had an underwriting income of $1.3
million for 2000, compared to an underwriting loss of $522,000 and $470,000 for
1999 and 1998, respectively. In 2000, the Company decreased IBNR reserves by $2
million after consultation with the independent actuary retained by the Company
to assess the adequacy of these reserves. Had the Company not decreased these
reserves, the Company would have had an underwriting loss of $694,000 in 2000,
compared to an underwriting loss of $522,000 and $470,000 in 1999 and 1998,
respectively. In addition to the discontinued reinsurance assumed, the Company
is involved in active reinsurance assumed business, which is described in
footnote 4(c) to the Financial Statements. The active reinsurance assumed
business has a minimal effect on the overall underwriting operations of the
Company, contributing underwriting income of $108,000, $101,000 and $59,000 for
2000, 1999 and 1998, respectively.
Commissions, other underwriting expenses, investment income and income taxes are
allocated by line of business as described below.
Commissions and other underwriting expenses are allocated to the lines of
business based on premium volume and weighted average salaries by full-time
equivalent employees.
Investment income is allocated by line of business as well as to capital and
surplus based on a complex formula that incorporates premium volume, reserves
and surplus to allocate among the different lines of business as well as to
capital and surplus.
Income taxes are allocated to the lines of business based on the effective tax
rates for the different items affecting income - investment income (dividends,
interest and capital gains) and underwriting income.
YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to
become year 2000 ready. In 1999 the Company completed its remediation and
testing of systems. As a result of the planning and implementation efforts, the
Company experienced no significant disruptions in mission critical information
technology and non-information technology systems and believes those systems
successfully responded to the year 2000 date change.
The Company expensed approximately $90,000 during 1999 in connection with
remediating its systems. The Company is not aware of any material problems
resulting from year 2000 issues, either with our products, our internal systems
or the products and services of third parties. The Company will continue to
monitor its mission critical computer applications and those of its agents and
vendors throughout the year 2000 to ensure that any latent year 2000 matters
that may arise are addressed promptly.
SAFE HARBOR STATEMENT
Some of the statements in this report, as well as statements by the Company in
periodic press releases and oral statements made by the Company's officials to
analysts and shareholders in the course of presentations about the Company,
constitute "forward-looking statements" within the meaning fo the Private
Securities Litigations Reform act of 1995. Such forward-looking statements
involve known and unknown risks, estimates subject to change in circumstances,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by the forward-looking
statements.
15
Item 8. Financial Statements and Supplementary Data
- -------- -----------------------------------------------
Financial Statements The financial statements filed by CTC in
---------------------
connection with this annual report are
consolidated financial statements which present
all of the operations of the parent company and
its subsidiaries.
(1) Capitol Transamerica Corporation
Consolidated Financial Statements.
(2) Report of independent auditors.
(3) Consolidated balance sheets- December
31, 2000 and 1999.
(4) Consolidated statements of income- for
each of the three years in the period
ended December 31, 2000.
(5) Consolidated statements of shareholders'
investment and comprehensive income
(loss)- for each of the three years in
the period ended December 31, 2000.
(6) Consolidated statements of cash flows-
for each of the three years in the
period ended December 31, 2000.
(7) Notes to consolidated financial
statements.
16
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1 and 2. Financial statements and financial statement schedules
The following financial statements of Capitol Transamerica
Corporation and Subsidiaries are included in Item 8.
Consolidated balance sheets - December 31, 2000 and 1999.
Consolidated statements of income - for each of the three years
in the period ended December 31, 2000.
Consolidated statements of shareholders' investment and
comprehensive income- for each of the three years in the period
ended December 31, 2000.
Consolidated statements of cash flows - for each of the three
years in the period ended December 31, 2000.
Notes to consolidated financial statements.
The following financial statement schedules of Capitol Transamerica
Corporation and Subsidiaries are included in Item 14(d).
Schedule I Summary of Investments Other than Investments in
Related Parties
Schedule II Condensed Financial Information of Registrant -
Parent Company
Schedule III Supplementary Insurance Information
Schedule IV Reinsurance
Schedule VI Supplemental Information Concerning
Property-Casualty Insurance Operations
All other schedules required by Article 7 of Regulation S-K are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
(b) No Reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended December 31, 2000.
(c) Exhibits
The following is filed as an exhibit to this Report:
Exhibit No. Description
---------- -----------
23 Consent of Ernst & Young LLP, independent auditors.
(d) Financial Statement Schedules
Reference is made to the financial statement schedules above.
17
SIGNATURES
----------
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of l934, the Company has duly caused this amendment to report to be
signed on its behalf by the undersigned, thereunto duly authorized on the
7th day of December, 2001.
CAPITOL TRANSAMERICA CORPORATION
By: /s/ George A. Fait
-------------------------------
George A. Fait
Chairman of the Board, President and
Director
By: /s/ Paul J. Breitnauer
-------------------------------
Paul J. Breitnauer
Vice President and Treasurer
18
RESPONSIBILITY FOR FINANCIAL REPORTING
To The Shareholders and Board of Directors of Capitol Transamerica Corporation:
The Company has prepared the consolidated financial statements, related notes,
and other financial data appearing in this Annual Report. The statements were
developed using accounting principles generally accepted in the United States
and policies considered appropriate in the circumstances. They reflect, where
applicable, management's best estimates and judgments. The financial data also
includes disclosures and explanations that are relevant to an understanding of
the financial affairs of the Company. To meet management's responsibility for
financial reporting, internal control systems and procedures are designed to
provide reasonable assurance as to the reliability of the financial records and
compliance with corporate policy throughout the organization.
Ernst & Young LLP, independent auditors, have audited the financial statements.
To express an opinion thereon, they review and evaluate the Company's internal
accounting controls and conduct such tests of the accounting records and other
auditing procedures as they deem necessary. The Board of Directors oversees the
Company's financial reporting through its Audit Committee, which regularly meets
with the independent auditors, both with and without management present, to
review accounting, auditing and financial reporting matters. A policy of
business ethics is communicated annually to the Company's directors, officers
and responsible employees. The Company monitors compliance with the policy to
help assure that operations are conducted in a responsible and professional
manner with a commitment to the highest standard of business conduct.
Paul J. Breitnauer
Vice President and Treasurer
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Capitol Transamerica Corporation:
We have audited the accompanying consolidated balance sheets of Capitol
Transamerica Corporation (the "Company") as of December 31, 2000 and 1999, and
the related consolidated statements of operations, shareholders' investment and
comprehensive income, and cash flows for the three years in the period ended
December 31, 2000. Our audits also included the financial statement schedules
listed in the Index at Item 14(a). These financial statements and schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Capitol
Transamerica Corporation at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
Ernst & Young LLP
Milwaukee, Wisconsin
February 16, 2001
19
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
2000 1999
------------ ------------
Assets
Investments (Notes (1)(b) and (2)):
Available-for-sale investment securities, at fair value
Fixed maturities (amortized cost $85,369,980 and $80,019,257, respectively) $ 90,841,811 $ 83,210,487
Equity securities:
Common stock, (cost $123,504,211 and $125,913,872, respectively) 119,413,538 116,656,582
Nonredeemable preferred stock, (cost $6,470,793 and
$5,725,500, respectively) 5,516,567 5,695,567
Investment real estate, at cost, net of depreciation 11,008,554 10,540,426
Short-term investments, at cost which approximates fair value (Note(2)(d)) 5,587,306 1,982,122
------------ ------------
Total Investments 232,367,776 218,085,184
------------ ------------
Cash 3,641,628 1,080,435
Accrued investment income 1,953,466 1,927,901
Receivables from agents, insureds and others, less allowance
for doubtful accounts of $530,000 each year 18,438,610 14,892,647
Balances due from reinsurers 1,794,851 -
Funds held by ceding reinsurers 47,000 40,000
Income taxes recoverable- current 67,463 686,240
Deferred income taxes (Notes (1)(f) and (5)) 2,468,713 4,153,393
Deferred insurance acquisition costs (Note (1)(e)) 13,726,372 12,644,189
Prepaid reinsurance premiums 1,714,017 1,287,627
Due from securities brokers 4,218,650 639,136
Other assets 2,819,506 2,114,074
------------ ------------
Total Assets $283,258,052 $257,550,826
============ ============
The accompanying notes to the consolidated financial statements are
an integral part of these financial statements.
20
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
2000 1999
------------- -------------
Liabilities
Policy Liabilities and Accruals (Notes (1)(d), (3) and (4)):
Reserve for losses $ 52,231,685 $ 53,575,780
Reserve for loss adjustment expenses 25,749,288 23,680,412
Unearned premiums 45,587,586 39,454,257
------------- -------------
Total Policy Liabilities and Accruals 123,568,559 116,710,449
------------- -------------
Accounts payable 4,203,407 3,950,898
Claim drafts outstanding 4,927,097 1,854,701
Due to securities brokers 34,125 -
Balances due to reinsurers 4,097,368 1,469,705
Accrued premium taxes 727,627 338,863
------------- -------------
Total Other Liabilities 13,989,624 7,614,167
------------- -------------
Total Liabilities 137,558,183 124,324,616
------------- -------------
Commitments and contingent liabilities (Notes (4) and (8)) - -
Shareholders' Investment (Notes (6) and (7))
Common stock, $1.00 par value, authorized 15,000,000 shares,
issued 11,558,767 and 11,538,970, respectively 11,558,767 11,538,970
Paid-in surplus 22,733,088 22,594,538
Accumulated other comprehensive income (loss), net of deferred taxes of
$149,428 and ($2,133,595), respectively (Notes (1)(b) and (2)) 277,504 (3,962,398)
Retained earnings 114,944,048 103,577,193
------------- -------------
Shareholders' investment before treasury stock 149,513,407 133,748,303
Treasury stock, 549,867 and 271,071 shares, respectively, at cost (3,813,538) (522,093)
------------- -------------
Total Shareholders' Investment 145,699,869 133,226,210
------------- -------------
Total Liabilities and Shareholders' Investment $283,258,052 $257,550,826
============= =============
The accompanying notes to the consolidated financial statements are
an integral part of these financial statements.
21
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------- ------------ ------------
Revenues:
Premiums earned (Note (1)(c)) $ 88,184,842 $ 82,841,104 $ 88,629,476
Net investment income (Note (2)(e)) 9,163,062 9,136,244 9,119,936
Realized investment gains (Notes (1)(b) and (2)) 11,805,350 8,184,101 13,198,139
Other revenues 355,208 249,672 113,005
------------- ------------ ------------
Total Revenues 109,508,462 100,411,121 111,060,556
------------- ------------ ------------
Losses and Expenses Incurred (Notes (1)(d), (3) and (4)):
Losses incurred 43,728,496 34,407,096 43,994,221
Loss adjustment expenses incurred 13,772,879 10,893,745 8,382,893
Underwriting, acquisition and insurance expenses (Note (10)) 32,299,497 28,920,512 28,558,650
(Increase) decrease in deferred insurance acquisition costs (1,082,183) 880,588 662,164
Other expenses 1,471,512 1,398,483 1,461,640
------------- ------------ ------------
Total Losses and Expenses Incurred 90,190,201 76,500,424 83,059,568
------------- ------------ ------------
Income from operations before income taxes 19,318,261 23,910,697 28,000,988
Income tax expense (Note (5)) 4,864,944 7,198,234 8,577,075
------------- ------------ ------------
Net Income $ 14,453,317 $ 16,712,463 $ 19,423,913
============= ============ ============
Income Per Share- basic (Note (1)(g)) $ 1.30 $ 1.49 $ 1.73
============= ============ ============
Weighted average number of shares outstanding- basic (Note (1)(g)) 11,124,074 11,252,358 11,206,018
============= ============ ============
Income Per Share- diluted (Note (1)(g)) $ 1.30 $ 1.48 $ 1.72
============= ============ ============
Weighted average number of shares outstanding- diluted (Note (1)(g)) 11,158,462 11,297,289 11,280,442
============= ============ ============
The accompanying notes to the consolidated financial statements are an integral
part of these financial statements.
22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
AND COMPREHENSIVE INCOME (LOSS)
Common Accumulated
Stock Other
(Par Value Paid-In Comprehensive Comprehensive Retained Treasury
$1.00) Surplus Income (Loss) Income (Loss) Earnings Stock
------------ ----------- --------------- --------------- ------------- ------------
Balance, January 1, 1998 $11,502,520 $21,832,206 $ - $ 32,676,572 $ 73,732,118 $ (401,275)
Comprehensive income (loss):
Net income - - 19,423,913 - 19,423,913 -
---------------
Other comprehensive loss:
Unrealized depreciation on
available-for-sale securities,
net of deferred taxes - - (6,078,237) - - -
Less: reclassification adjustment,
net of tax of $4,619,349,
for gain included in net income - - (8,578,790) - - -
---------------
Other comprehensive loss - - (14,657,027) (14,657,027) - -
---------------
Comprehensive income - - 4,766,886 - - -
Stock options exercised 26,856 142,409 - - - (18,952)
Purchases and sales
of treasury stock, net - 271,751 - - - (75,332)
Cash dividends paid - - - - (3,139,786) -
------------ ----------- --------------- --------------- ------------- ------------
Balance, December 31, 1998 11,529,376 22,246,366 - 18,019,545 90,016,245 (495,559)
Comprehensive income (loss):
Net income - - 16,712,463 - 16,712,463 -
---------------
Other comprehensive loss:
Unrealized depreciation on
available-for-sale securities,
net of deferred taxes - - (16,662,277) - - -
Less: reclassification adjustment,
net of tax of $2,864,435,
for gain included in net income - - (5,319,666) - - -
---------------
Other comprehensive loss - - (21,981,943) (21,981,943) - -
---------------
Comprehensive loss - - (5,269,480) - - -
Stock options exercised 9,594 57,748 - - - (26,534)
Purchases and sales
of treasury stock, net - 290,424 - - - -
Cash dividends paid - - - - (3,151,515) -
------------ ----------- --------------- --------------- ------------- ------------
Balance, December 31, 1999 $11,538,970 $22,594,538 $ - $ (3,962,398) $103,577,193 $ (522,093)
Comprehensive income
Net income - - 14,453,317 - 14,453,317 -
---------------
Other comprehensive income:
Unrealized appreciation on
available-for-sale securities,
net of deferred taxes - - 11,913,380 - - -
Less: reclassification adjustment,
net of tax of $2,546,352,
for gain included in net income - - (7,673,478) - - -
---------------
Other comprehensive income - - 4,239,902 4,239,902 - -
---------------
Comprehensive income - - 18,693,219 - - -
Stock options exercised 19,797 138,550 - - - (76,250)
Stock-based compensation - - - - 25,476 -
Purchases and sales
of treasury stock, net - - - - - (3,215,195)
Cash dividends paid - - - - (3,111,938) -
------------ ----------- --------------- --------------- ------------- ------------
Balance, December 31, 2000 $11,558,767 $22,733,088 $ - $ 277,504 $114,944,048 $(3,813,538)
============ =========== =============== =============== ============= ============
The accompanying notes to the consolidated financial statements are an integral
part of these financial statements.
23
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------- ------------- -------------
Cash flows provided by operating activities:
- - ----------------------------------------------------------------------
Net Income $ 14,453,317 $ 16,712,463 $ 19,423,913
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,215,024 1,161,702 1,195,955
Realized investment gains (11,805,350) (8,184,101) (13,198,139)
Change in:
Deferred insurance acquisition costs (1,082,183) 880,588 662,164
Unearned premiums 6,133,329 (2,087,175) (5,870,417)
Allowance for doubtful accounts receivable from agents - 30,000 60,000
Accrued investment income (25,565) (248,903) 28,694
Receivables from agents, insureds and others (3,545,963) 2,294,999 3,542,835
Balances due to/from reinsurers 149,564 317,498 (191,361)
Reinsurance recoverable on paid and unpaid losses 683,248 1,026,426 (897,506)
Funds held by ceding reinsurers (7,000) (4,244) (35,756)
Income taxes payable/recoverable 618,777 (635,702) 633,804
Deferred income taxes (598,340) (538,796) (304,896)
Due to/from securities brokers (3,545,389) 763,512 (6,721,020)
Prepaid reinsurance premiums (426,390) (560,553) 16,914
Other assets (707,858) (332,788) (5,305)
Reserves for losses and loss adjustment expenses 724,781 (1,247,858) 7,031,712
Accounts payable 3,324,905 (371,947) 371,977
Accrued premium taxes 388,764 101,692 (99,992)
------------- ------------- -------------
Net cash provided by operating activities 5,947,671 9,076,813 5,643,576
------------- ------------- -------------
Cash flows provided by (used for) investing activities:
- - ----------------------------------------------------------------------
Proceeds from sales of available-for-sale investments 26,278,568 29,718,246 40,484,195
Purchases of available-for-sale investments (26,716,842) (44,377,254) (49,573,482)
Maturities of available-for-sale investments 4,053,867 8,690,009 7,660,719
Purchases of depreciable assets (782,511) (751,534) (1,080,065)
------------- ------------- -------------
Net cash provided by (used for) investing activities 2,833,082 (6,720,533) (2,508,633)
------------- ------------- -------------
Cash flows used for financing activities:
- - ----------------------------------------------------------------------
Cash dividends paid (3,111,938) (3,151,515) (3,139,786)
Stock options exercised 45,273 40,808 441,017
Net (cost of) proceeds from sale (purchase) of treasury stock (3,152,895) 290,424 (94,284)
------------- ------------- -------------
Net cash used for financing activities (6,219,560) (2,820,283) (2,793,053)
------------- ------------- -------------
Net increase (decrease) in cash 2,561,193 (464,003) 341,890
Cash, beginning of year 1,080,435 1,544,438 1,202,548
------------- ------------- -------------
Cash, end of year $ 3,641,628 $ 1,080,435 $ 1,544,438
============= ============= =============
Cash paid during the year for:
Income taxes $ 4,856,364 $ 8,611,726 $ 8,358,132
The accompanying notes to the consolidated financial statements are an
integral part of these financial statements.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
----------------------------------------------
Capitol Transamerica Corporation (the "Company") is an insurance
holding company, which writes, through its subsidiaries, commercial
insurance coverages in 37 states. The property-casualty insurance
coverages represent approximately 77% of the Company's premiums
written while fidelity-surety coverages represent approximately 23% of
the Company's premiums written. The Company's products are marketed
through independent agents located throughout the United States.
The consolidated financial statements are presented in accordance with
accounting principles generally accepted in the United States
("GAAP"). The preparation of financial statements of insurance
companies requires management to make estimates and assumptions that
affect amounts reported in the financial statements and accompanying
notes. Actual results could differ significantly from those estimates.
(a) Principles of Consolidation
-----------------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Capitol Indemnity
Corporation ("CIC"), Capitol Specialty Insurance Corporation ("CSIC")
and Capitol Facilities Corporation ("CFC"). All significant
inter-company accounts and transactions have been eliminated in
consolidation.
(b) Investments
-----------
The Company classifies all of its fixed maturities and equity
securities as available-for-sale. Accordingly, investments in fixed
maturities and equity securities are reported at fair value, with
unrealized gains and losses reported in a separate component of
shareholders' investment, net of tax effect. 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
depreciation of $1,595,693 and $1,173,643 as of December 31, 2000 and
December 31, 1999, respectively. The real estate is depreciated over
the estimated useful life of the asset.
Cost of investments sold is determined under the specific
identification method.
(c) Premiums
--------
Premiums are recognized as revenue on a pro-rata basis over the term
of the contracts. Approximately 18.5% and 13.9% of the total premiums
written are on risks located in Wisconsin and Illinois, respectively.
No other state exceeds 10%.
(d) Loss and Loss Adjustment Expenses
-------------------------------------
Losses and loss adjustment expenses less related reinsurance and
subrogation recoverable, are provided for as claims are incurred. The
reserves for losses and loss adjustment expenses include: (1) the
accumulation of individual estimates for claims reported on direct
business prior to the close of the accounting period; (2) estimates
received from other insurers with respect to reinsurance assumed; (3)
estimates for incurred but not reported claims based on past
experience modified for current trends; and (4) estimates of expenses
for investigating and settling claims based on past experience. The
liabilities recorded are based on estimates resulting from the
continuing review process, and differences between estimates and
ultimate payments are reflected in expense for the period in which the
estimates are changed.
25
(e) Deferred Insurance Acquisition Costs
---------------------------------------
Deferred insurance acquisition costs that vary with, and are directly
related to, the production of premiums (principally commissions,
premium taxes, compensation and certain underwriting expenses) are
deferred. Deferred insurance acquisition costs are amortized to
expense as the related premiums are earned.
(f) Income Taxes
-------------
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial statement purposes and the amounts used for income tax
reporting.
(g) Income Per Share
------------------
Basic income per share is computed by dividing net income by the
weighted-average number of shares of stock outstanding during the
year. Diluted income per share is computed by dividing net income by
the weighted- average number of shares of common stock and common
stock equivalents from options outstanding. The following table sets
forth the computation of basic and diluted EPS:
December 31,
2000 1999 1998
----------- ----------- -----------
Numerator:
Consolidated net income $14,453,317 $16,712,463 $19,423,913
Denominator:
Denominator for basic EPS -
weighted average shares 11,124,074 11,252,358 11,206,018
Effect of dilutive securities -
unexercised stock options 34,388 44,931 74,424
----------- ----------- -----------
Denominator for diluted EPS 11,158,462 11,297,289 11,280,442
Basic EPS $ 1.30 $ 1.49 $ 1.73
Diluted EPS $ 1.30 $ 1.48 $ 1.72
(h) Comprehensive Income (Loss)
-----------------------------
Comprehensive income (loss) is defined as net income plus or minus
other comprehensive income (loss), which for the Company, under
existing accounting standards, consists of unrealized gains and
losses, net of income tax effects, on certain investments in debt and
equity securities. Comprehensive income (loss) is reported by the
Company in the consolidated statements of changes in shareholders'
investment and comprehensive income (loss).
(i) Reclassifications
-----------------
Certain reclassifications have been made to the 1999 financial
statements to conform with the 2000 presentation.
26
(2) Investments
-----------
(a) The amortized cost and estimated fair value of fixed maturities and
equity securities are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Type of investment Cost Gains Losses Value
- - -------------------------------------------------------------------------------------------
DECEMBER 31, 2000
Fixed maturities:
U.S. Government bonds $ 33,930 $ 1,690 - $ 35,620
State, municipal and political
subdivision bonds 84,236,162 5,559,420 (63,528) 89,732,054
Corporate bonds and notes 1,099,888 - (25,751) 1,074,137
- - -------------------------------------------------------------------------------------------
Total fixed maturities $ 85,369,980 $ 5,561,110 ($89,279) $ 90,841,811
===========================================================================================
Equity securities:
Common stock $123,504,211 $26,442,675 ($30,533,348) $119,413,538
Non-redeemable preferred stock 6,470,793 185,332 (1,139,558) 5,516,567
- - -------------------------------------------------------------------------------------------
Total equity securities $129,975,004 $26,628,007 ($31,672,906) $124,930,105
===========================================================================================
DECEMBER 31, 1999
Fixed maturities:
U.S. Government bonds $ 39,428 $ 2,196 - $ 41,624
State, municipal and political
subdivision bonds 78,855,846 4,423,576 (1,204,274) 82,075,148
Corporate bonds and notes 1,123,983 - (30,268) 1,093,715
- - -------------------------------------------------------------------------------------------
Total fixed maturities $ 80,019,257 $ 4,425,772 ($1,234,542) $ 83,210,487
===========================================================================================
Equity securities:
Common stock $125,913,872 $16,310,888 ($25,568,178) $116,656,582
Non-redeemable preferred stock 5,725,500 552,975 (582,908) 5,695,567
- - -------------------------------------------------------------------------------------------
Total equity securities $131,639,372 $16,863,863 ($26,151,086) $122,352,149
===========================================================================================
(b) The amortized cost and estimated fair value of fixed maturities at
December 31, 2000, by contractual maturity, is shown below. Expected
maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call
or prepayment penalties.
Amortized Fair
Cost Value
----------------------------------------------------------------
Due in one year or less $ - $ -
Due after one year through five years 3,014,408 3,125,891
Due after five years through ten years 10,295,355 10,745,902
Due after ten years 72,060,217 76,970,018
----------------------------------------------------------------
Total $85,369,980 $90,841,811
================================================================
27
(c) Realized gains (losses) and change in unrealized gains (losses) for
the three years ended December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998
- - -----------------------------------------------------------------------------------------
Realized gains (losses):
Fixed maturities
Gross gains $ 45,234 $ 66,054 $ 64,575
Gross losses (4,235) (6,386) (5,040)
Equity securities
Gross gains 12,398,816 8,174,659 13,138,613
Gross losses (634,465) (50,226) (9)
Other - - -
- - -----------------------------------------------------------------------------------------
Net realized gains $11,805,350 $ 8,184,101 $ 13,198,139
=========================================================================================
Change in unrealized gains (losses):
Fixed maturities $ 2,280,601 ($3,659,687) $ 2,214,372
Equity securities 4,242,324 (30,158,682) (24,001,959)
- - -----------------------------------------------------------------------------------------
Net change in unrealized gains (losses) 6,522,926 (33,818,369) (21,787,587)
Less effect of applicable deferred taxes 2,283,024 (11,836,426) (7,130,560)
- - -----------------------------------------------------------------------------------------
Net increase (decrease) in unrealized gains $ 4,239,902 ($21,981,943) ($14,657,027)
=========================================================================================
Following is a summary of total unrealized gains (losses) as of
December 31, 2000, 1999 and 1998:
2000 1999 1998
- - ---------------------------------------------------------------------------------------
Unrealized gains (losses):
Fixed maturities
Gross unrealized gains $ 5,561,110 $ 4,425,772 $ 6,860,733
Gross unrealized losses (89,279) (1,234,542) (9,819)
Equity securities
Gross unrealized gains 26,628,007 16,863,863 32,173,006
Gross unrealized losses (31,672,906) (26,151,086) (11,301,546)
- - ---------------------------------------------------------------------------------------
Gross unrealized gains (losses) 426,932 (6,095,993) 27,722,374
Less effect of applicable deferred taxes 149,428 (2,133,595) 9,702,829
- - ---------------------------------------------------------------------------------------
Net unrealized gains (losses) $ 277,504 ($3,962,398) $ 18,019,545
=======================================================================================
(d) The fair value of securities on deposit with insurance regulators
in accordance with statutory requirements was $3,936,264 at December
31, 2000 and $3,927,732 at December 31, 1999.
In connection with the reinsurance assumed operations, CIC has
established security trust fund agreements with a bank, consisting of
cash and securities in the amount of $835,000 at December 31, 2000 and
$865,000 at December 31, 1999.
28
(e) Following is a summary of investment income from each category of
investments:
2000 1999 1998
- - ------------------------------------------------------------------------
Fixed maturities $ 4,927,452 $ 4,732,097 $ 4,619,471
Equity securities 3,792,573 3,917,943 3,907,213
Investment real estate 2,343,288 2,458,961 2,383,255
Short-term 350,688 252,387 186,341
- - ------------------------------------------------------------------------
Total investment income 11,414,001 11,361,388 11,096,280
Investment expenses - real estate 1,484,161 1,434,580 1,310,113
Other investment expenses 344,742 406,518 321,016
Depreciation on real estate 422,036 384,046 345,215
- - ------------------------------------------------------------------------
Net investment income $ 9,163,062 $ 9,136,244 $ 9,119,936
========================================================================
(f) The Company had investments in state, municipal and political
subdivision bonds with amortized costs of $84,236,162 and $78,855,846
at December 31, 2000 and 1999 respectively. Approximately 93% of these
bonds were special assessment revenue bonds and approximately 7% of
these bonds were state and political subdivision obligations at
December 31, 2000 and 1999. The Company monitors its exposure by
investing its funds in accordance with guidelines set by the Company's
investment committee. At December 31, 2000, approximately 40% of the
municipal bond portfolio consisted of securities of Wisconsin and
Minnesota. No other state total exceeded 10%.
(g) Fair values for fixed maturities and equity securities are
determined from quoted market prices where available, or are estimated
using values obtained from independent pricing services. Thinly traded
fixed maturities are individually priced based upon year-end market
conditions, type of security, interest rate and maturity of the issue.
(3) Reserves for Losses and Loss Adjustment Expenses
------------------------------------------------------
The table below provides a reconciliation of the beginning and ending
reserves for losses and loss adjustment expenses, net of reinsurance:
29
2000 1999 1998
- - ---------------------------------------------------------------------------------------------------
Balance as of January 1, $77,256,192 $78,504,050 $71,472,338
Reinsurance balances 121,478 (1,101,770) (594)
- - ---------------------------------------------------------------------------------------------------
Net reserves 77,377,670 77,402,280 71,471,744
Incurred losses and loss adjustment expenses related to:
Current year 60,051,007 47,749,455 49,862,090
Prior years
Direct losses (net of ceded) (1,744,893) (562,627) 4,091,923
Direct loss adjustment expenses (net of ceded) 520,814 (2,379,899) (1,956,631)
Discontinued assumed reinsurance (1,325,553) 493,912 379,732
- - ---------------------------------------------------------------------------------------------------
Total prior years (2,549,632) (2,448,614) 2,515,024
Total incurred 57,501,375 45,300,841 52,377,114
- - ---------------------------------------------------------------------------------------------------
Paid losses and loss adjustment expenses related to:
Current year 25,045,636 18,642,962 20,035,517
Prior years 29,411,213 26,682,489 26,370,166
- - ---------------------------------------------------------------------------------------------------
Total paid 54,456,849 45,325,451 46,405,683
- - ---------------------------------------------------------------------------------------------------
Other adjustments, net - - (40,895)
- - ---------------------------------------------------------------------------------------------------
Net balance at December 31 80,422,196 77,377,670 77,402,280
Reinsurance balances (2,441,223) (121,478) 1,101,770
- - ---------------------------------------------------------------------------------------------------
Balance at December 31 $77,980,973 $77,256,192 $78,504,050
===================================================================================================
30
The Company continually reviews its reserves for losses and loss
adjustment expenses and the related reinsurance recoverables. As
explained in Note (1)(d), differences between estimates and ultimate
payments are reflected in expense for the period in which the
estimates are changed. As a result of the variability in these
estimates, reserves have differed from actual experience during 2000,
1999 and 1998. The actuarial estimates are based on past claim
experience and consider current claim trends and premium volume as
well as social and economic conditions.
While the Company has recorded its best estimate of its reserves for
losses and loss adjustment expenses, it is reasonably possible these
estimates, net of estimated reinsurance recoverables, may change in
the future. See Note 4(b) for a discussion of discontinued assumed
reinsurance.
(4) Reinsurance
-----------
(a) Ceded
-----
From 1996 through 2000, the Company reinsured losses in excess of
$1,000,000 with various other companies through reinsurance ceded
contracts. These arrangements provide for greater diversification of
business, allow the Company to control exposure to potential losses
arising from large risks, and provide additional capacity for growth.
Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the reinsured
policies.
Reinsurance ceded contracts do not relieve the Company from its
obligations to policyholders. The Company remains liable to its
policyholders for the portion reinsured to the extent that any
reinsurer does not meet the obligations assumed under the reinsurance
agreements. To minimize its exposure to losses from reinsurer
insolvencies, the Company continually evaluates the financial
condition of its reinsurers.
(b) Assumed - Discontinued
------------------------
The Company was involved in providing reinsurance coverage by assuming
a portion of risks underwritten by other insurance companies and risk
pools, including asbestos and environmental risks. Although the
Company withdrew from this reinsurance business in 1976, liability
remains for losses on policies written during the period in which it
participated as a reinsurer. The discontinued reinsurance assumed loss
reserves are based on current information available from the ceding
companies and are continually reviewed for accuracy and
reasonableness.
Management believes that the reserves of $7,344,795 at December 31,
2000 are adequate, but recognizes the uncertainty industry-wide
concerning these exposures. Establishing net loss reserves for
environmental and asbestos claims is subject to uncertainties that are
greater than those presented by other types of claims. Among the
complications are lack of historical data, long reporting delays,
uncertainty as to the number and identity of insureds with potential
exposure, unresolved legal issues regarding policy coverage,
availability of reinsurance and the extent and timing of any such
contractual liability. The legal issues concerning the interpretation
of various insurance policy provisions and whether those losses are,
or were ever intended to be covered, are complex. Courts have reached
different and sometimes inconsistent conclusions as to when losses are
deemed to have occurred and which policies provide coverage; what
types of losses are covered; whether there is an insurer obligation to
defend; how policy limits are determined; how policy exclusions and
conditions are applied and interpreted; and whether clean-up costs
represent insured property damage. Management believes these issues
are not likely to be resolved in the near future. The Company has
provided a letter of credit relating to reinsurance assumed of
$130,000 at both December 31, 2000 and 1999.
31
(c) Assumed - Active
------------------
CIC participates in reinsurance programs in the accident and health
and commercial multiple peril lines of business. The exposure on this
business is minimal.
Net written and earned premiums and losses and loss adjustment
expenses included in this reinsurance activity are as follows:
Written Premiums
-----------------------------------------
2000 1999 1998
- - ---------------------------------------------------------------
Direct $100,103,877 $84,460,081 $86,329,672
Assumed 2,006,338 1,542,719 1,599,480
Ceded (8,218,433) (5,809,424) (5,153,179)
- - --------------------------------------------------------------
Net premiums written $ 93,891,782 $80,193,376 $82,775,973
===============================================================
Earned Premiums
----------------------------------------
2000 1999 1998
- - -------------------------------------------------------------
Direct $93,981,038 $86,565,885 $92,203,082
Assumed 1,995,850 1,524,090 1,596,487
Ceded (7,792,046) (5,248,871) (5,170,093)
- - -------------------------------------------------------------
Net premiums earned $88,184,842 $82,841,104 $88,629,476
=============================================================
32
Losses and Loss Adjustment Expenses Incurred
2000 1999 1998
- - ----------------------------------------------------------------------------------------
Direct $66,443,778 $47,738,063 $53,447,519
Assumed - Losses (408,609) 1,253,237 280,900
Assumed - Legal and audit 30,571 17,084 98,832
Ceded (8,564,365) (3,707,543) (1,450,137)
- - ----------------------------------------------------------------------------------------
Net loss and loss adjustment expenses incurred $57,501,375 $45,300,841 $52,377,114
========================================================================================
(5) Income Taxes
-------------
(a) The Company and its subsidiaries file a consolidated federal income
tax return and separate state franchise and premium tax returns as
applicable.
(b) The components of income tax expense for the years 2000, 1999 and 1998
are as follows:
2000 1999 1998
- - ----------------------------------------------------------------------------------------------
Current expense:
Federal $4,827,862 $7,115,401 $8,096,181
State 635,425 621,630 785,787
- - ----------------------------------------------------------------------------------------------
Total current expense 5,463,287 7,737,031 8,881,968
Deferred expense(benefit):
Deferred insurance acquisition costs 378,764 (308,206) (231,757)
Unearned premiums (399,486) 185,341 409,745
Discount on loss and loss adjustment expense reserves (555,695) (69,897) (322,034)
Unpaid commissions (18,931) (333,362) (140,748)
Other, net (2,995) (12,673) (20,099)
- - ----------------------------------------------------------------------------------------------
Total deferred benefit (598,343) (538,797) (304,893)
- - ----------------------------------------------------------------------------------------------
Income tax expense $4,864,944 $7,198,234 $8,577,075
==============================================================================================
(c) A reconciliation of the effective income tax rate, as reflected in
the consolidated statements of income, to the statutory federal income
tax rate, is as follows:
2000 1999 1998
- - ----------------------------------------------------------------------------
Statutory tax rate 35.0% 35.0% 35.0%
Municipal bond income, net of proration (7.7%) (5.9%) (4.9%)
Dividend received exemption, net of proration (2.1%) (1.8%) (1.7%)
State income tax expense, net of federal tax benefit 2.1% 1.7% 1.7%
Other, net (2.1%) 1.1% 0.5%
- - ----------------------------------------------------------------------------
Effective income tax rate 25.2% 30.1% 30.6%
============================================================================
33
(d) Significant components of the deferred tax liabilities and assets
are as follows:
December 31, December 31,
2000 1999
- - -------------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred insurance acquisition costs $ 4,804,230 $ 4,425,466
Net unrealized gains on investment securities 149,425 -
Other, net 110,934 79,339
- - -------------------------------------------------------------------------------------
Total deferred tax liabilities 5,064,589 4,504,805
- - -------------------------------------------------------------------------------------
Deferred tax assets:
Unearned premium reserve discounting 3,071,150 2,671,664
Loss and loss adjustment expense reserve discounting 3,197,269 2,641,574
Net unrealized losses on investment securities - 2,133,595
Unpaid commissions 858,601 839,670
Other, net 406,283 371,695
- - -------------------------------------------------------------------------------------
Total deferred tax assets 7,533,302 8,658,198
- - -------------------------------------------------------------------------------------
Net deferred tax asset $ 2,468,713 $ 4,153,393
=====================================================================================
34
(6) Common Stock Options
----------------------
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related Interpretations in accounting for its stock options. Under APB
25, since the exercise price of the Company's stock options equals the
market price of the underlying stock at the date of the grant, no
compensation expense is recognized. The Company did recognize $25,476
in compensation expense during 2000 under FASB Interpretation 44
effective July 1, 2000 for APB 25 related to options which were
repriced to the stockmarket value in 1999.
Had the Company elected to follow the fair value method under SFAS 123
"Accounting for Stock-Based Compensation", net income and earnings per
share would not be materially different for the years 2000, 1999, and
1998. Pro forma disclosure is required and has been determined as if
the Company had accounted for its stock options under this method.
The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions for 2000, 1999, and 1998, respectively:
risk-free interest rates of 6.4%, 6.1%, and 4.4%; dividend yields of
2.4%, 2.0%, and 1.4%; volatility factors of the expected market price
of the Company's common stock of .394, .394 and .345; and a
weighted-average expected life of the options of two and one-half
years. The weighted-average fair value of options granted for the
years 2000, 1999, and 1998 was $3.03, $2.29, and $3.92, respectively.
The estimated fair value is amortized to expense over the options'
vesting period.
The Company's pro forma information follows:
2000 1999 1998
----------- ----------- -----------
Pro forma net income $14,333,943 $16,538,296 $19,156,540
Pro forma earnings per share:
Basic $ 1.30 $ 1.47 $ 1.71
Diluted $ 1.30 $ 1.46 $ 1.70
The Company's 1993 Stock Option Plan has authorized the grant of
options for up to 1,072,500 shares of the Company's common stock. All
options granted have a five year term and become fully vested at the
end of four years. Stock options available to be granted in the future
equal 721,011 shares at December 31, 2000.
35
A summary of the Company's stock option activity, and related
information for the years ended December 31 follows:
2000 1999 1998
- - -------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- - -------------------------------------------------------------------------------------
Outstanding,
beginning of year 280,545 $ 9.93 280,924 $ 13.38 237,111 $ 11.81
Granted 6,400 11.28 236,704 10.19 97,900 15.75
Exercised (19,797) 7.99 (9,594) 7.02 (26,856) 6.30
Expired (30,296) 9.40 (227,489) 14.58 (27,231) 15.15
-------- --------- -------- ----------
Outstanding,
end of year 236,852 $ 10.20 280,545 $ 9.93 280,924 $ 13.38
- - -------------------------------------------------------------------------------------
Options exercisable at December 31, 2000 were 64,890. The weighted
average remaining exercise period for all outstanding options as of
December 31, 2000 was 4.0 years. Exercise prices for options
outstanding as of December 31, 2000 ranged from $4.37 to $12.50 with
44%, and 52% having exercise prices of $9.69 and $10.66, respectively.
36
(7) Statutory Reporting
--------------------
(a) The financial statements of the insurance subsidiaries have been
prepared in accordance with accounting principles generally accepted
in the United States, which differ in certain respects from accounting
practices prescribed or permitted by insurance regulatory authorities
(statutory basis). The statutory capital and surplus, and net income
of the insurance subsidiaries as reported to state regulatory
authorities, were as follows:
Policyholders' Surplus as of December 31,
-------------------------------------------------------------------------------
2000 1999 1998
- - -------------------------------------------------------------------------------
Capitol Indemnity Corporation $107,917,384 $91,570,236 $102,902,836
Capitol Specialty Insurance Corporation 4,667,963 4,865,494 5,865,245
- - -------------------------------------------------------------------------------
Total $112,585,347 $96,435,730 $108,768,081
================================================================================
Net Income For The Year Ended December 31,
- - -------------------------------------------------------------------------------
2000 1999 1998
- - -------------------------------------------------------------------------------
Capitol Indemnity Corporation $13,003,336 $16,306,022 $19,051,239
Capitol Specialty Insurance Corporation 232,388 689,133 479,019
- - -------------------------------------------------------------------------------
Total $13,235,724 $16,995,155 $19,530,258
================================================================================
The Company's underwriting results can be measured by the combined loss
and expense ratios. 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 following table depicts the Company's two subsidiary
insurance companies' combined ratios on a statutory basis.
2000 1999 1998
--------------------------------- ----------- ------------ -------------
Loss and Loss Adjustment Exp. 65.4% 54.9% 59.4%
Underwriting Expense 35.1% 37.0% 35.6%
--------------------------------- ----------- ------------ -------------
Combined Ratio 100.5% 91.9% 95.0%
================================= =========== ============ =============
The Company's combined ratios continue to compare very favorably with
the industry average, as indicated by the following chart.
Combined Ratio 2000 1999 1998
------------------------------------------------------------------------
Company 100.5% 91.9% 95.0%
Industry * 109.3% 110.2% 105.9%
------------------------------------------------------------------------
*The industry number for 2000 is the ratio for commercial carriers at
September 30, 2000. The industry Data is based upon the report published
by Insurance Services Offices, Inc. entitled "Property/Casualty Insurance
Industry Financial Results: Nine-Months 2000 Analysis" dated as of
December 15, 2000.
37
Please reference Item 7 (Management Discussion and Analysis) for an analysis of
the significance of the combined ratio and what it means to an insurance
company.
(b) CIC is required by the Insurance Commissioner of the State of
Wisconsin to maintain a minimum compulsory surplus (surplus as regards
policyholders) of 25% of net premiums written during the preceding
twelve months. As of December 31, 2000, the amount of compulsory
surplus required to be maintained by CIC was $23,350,674.
(c) In accordance with state insurance regulations, the insurance
subsidiaries can distribute dividends to the Company of the lesser of
their net income or 10% of their surplus without regulatory approval.
(d) The National Association of Insurance Commissioners (NAIC) revised the
Accounting and Procedures Manual in a process referred to as
Codification, with the revised manual becoming effective January 1,
2001. The revised manual has changed, to some extent, prescribed
statutory accounting practices and will resultin changes to the
accounting practices CIC and CSIC use to prepare their statutory-basis
financial statements. Management believes the impact of these changes
to CIC's and CSIC's statutory-basis capital and surplus as of January
1, 2001 will be insignificant.
(8) Contingent Liabilities
-----------------------
CIC is a defendant in certain lawsuits involving complaints which demand
damages and recoveries for claims and losses allegedly related to risks
insured by CIC. 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 and loss adjustment expenses include
management's estimates of the probable ultimate cost of settling all losses
involving lawsuits. See Notes (1)(d), (3) and (4).
(9) Employee Benefit Plans
------------------------
The Company has a defined contribution benefit plan (the Plan) in which all
qualified employees are eligible to participate. The Plan incorporates a
contributory feature under Section 401(k) of the Internal Revenue Code
allowing employees to defer portions of their income through contributions
to the Plan. The Company's annual contribution to the Plan is 150% of the
first $1,500 of each participant's contributions during the plan year. The
Company made contributions of $250,637, $242,511 and $214,839 in 2000, 1999
and 1998, respectively.
The Company also has an Employee Stock Ownership Plan in which all
qualified employees are eligible to participate. The plan provides for
discretionary employer contributions of shares of Company stock or cash to
purchase shares of Company stock. The Company made contributions of
$301,000, $179,000 and $100,000 in 2000, 1999 and 1998, respectively.
(10) Underwriting, Acquisition and Insurance Expenses
----------------------------------------------------
A summary of underwriting, insurance acquisition costs and insurance
expenses incurred during the years ended December 31, 2000, 1999 and 1998
is as follows:
2000 1999 1998
- - ---------------------------------------------------------------------------------------------------
Net commissions $19,869,276 $18,001,338 $18,459,299
Salaries and other compensation 5,647,661 4,944,476 4,710,297
Other 6,782,560 5,974,697 5,389,054
- - ---------------------------------------------------------------------------------------------------
Total costs 32,299,497 28,920,511 28,558,650
(Increase) decrease in deferred insurance acquisition costs (1,082,183) 880,588 662,164
- - ---------------------------------------------------------------------------------------------------
Total underwriting, acquisition and insurance expenses $31,217,314 $29,801,099 $29,220,814
===================================================================================================
38
Included in net commissions is the fair value of CTC stock purchased by CIC
and issued to agents as part of a contingent commission agreement. The
amounts expensed were $201,212, $478,880 and $468,858 for the years 2000,
1999 and 1998, respectively.
Deferred insurance acquisition costs are amortized over the term of CIC
insurance contracts. The amount of deferred insurance costs amortized was
$28,431,941, $28,325,677 and $27,833,262 in 2000, 1999 and 1998,
respectively.
(11) Credit Lines
-------------
The Company has credit lines of $11,200,000. There were no significant
borrowings during 2000, and none outstanding as of December 31, 2000.
(12) Quarterly Results of Operations (Unaudited)
-----------------------------------------------
- - ------------------------------------------------------------------------------------------------------
For the year ended December 31, 2000 First Second Third Fourth Total
- - ------------------------------------------------------------------------------------------------------
Revenues $24,043,062 $26,676,380 $28,442,325 $30,346,695 $109,508,462
Losses and expenses incurred 15,768,779 22,009,105 23,921,438 28,490,879 90,190,201
Net income 5,680,879 3,391,751 3,323,751 2,056,936 14,453,317
Net income per share - basic $ 0.50 $ 0.30 $ 0.30 $ 0.20 $ 1.30
Net income per share - diluted $ 0.50 $ 0.30 $ 0.30 $ 0.20 $ 1.30
Dividends per share $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.28
- - ------------------------------------------------------------------------------------------------------
For the year ended December 31, 1999 First Second Third Fourth Total
- - ------------------------------------------------------------------------------------------------------
Revenues $25,089,802 $26,254,623 $25,857,210 $23,209,486 $100,411,121
Losses and expenses incurred 18,550,741 16,380,003 21,460,886 20,108,794 76,500,424
Net income 4,525,052 6,732,395 3,107,433 2,347,583 16,712,463
Net income per share - basic $ 0.40 $ 0.60 $ 0.28 $ 0.21 $ 1.49
Net income per share - diluted $ 0.39 $ 0.60 $ 0.28 $ 0.21 $ 1.48
Dividends per share $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.28
- - ------------------------------------------------------------------------------------------------------
For the year ended December 31, 1998 First Second Third Fourth Total
- - ------------------------------------------------------------------------------------------------------
Revenues $25,467,589 $31,516,526 $25,107,417 $28,969,024 $111,060,556
Losses and expenses incurred 20,787,325 21,504,889 21,144,534 19,622,820 83,059,568
Net income 3,460,541 7,032,357 2,806,682 6,124,333 19,423,913
Net income per share - basic $ 0.31 $ 0.62 $ 0.25 $ 0.55 $ 1.73
Net income per share - diluted $ 0.31 $ 0.62 $ 0.25 $ 0.54 $ 1.72
Dividends per share $ 0.07 $ 0.07 $ 0.07 $ 0.07 $ 0.28
39
(13) Industry Segment Disclosures
------------------------------
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) reinsurance assumed operations.
These segments constitute 100% of the operations of the Company.
The property and casualty segment provides specialty commercial coverages
for beauty and barber shops, bowling alleys, contractors/manufacturers,
day care centers, restaurants, detective/guard agencies, golf courses and
taverns. This segment also provides nurses professional, deerhunters and
sportsmen's accident, and special event coverages. The fidelity and surety
segment offers a full range of surety and fidelity bonds, including
contractor's payment and performance bonds, license/permit bonds,
fiduciary and judicial bonds, as well as commercial fidelity bonds. The
reinsurance assumed segment consists of active reinsurance assumed and
discontinued reinsurance assumed. The Company's discontinued reinsurance
assumed business involved providing reinsurance coverage by assuming a
portion of the risks underwritten by other insurance companies and risk
pools, including asbestos and environmental risks. Although the Company
withdrew from this reinsurance business in 1976, liability remains for
losses on policies written during the period in which it participated as a
reinsurer. The Company maintains and monitors its segment information on a
statutory basis. Financial data by segment, including a reconciliation to
consolidated GAAP basis, for 1998 through 2000 follows in the table below.
In analyzing this information, keep the following discussion in mind. The
reconciliation items to get to the consolidated GAAP basis come from three
sources: operating income from non-insurance operations, investment income
on capital and surplus, and intercompany eliminations (management fees for
intercompany services provided and dividend income on parent company stock
held by affiliates). Specifically, loss adjustment expenses are adjusted
for intercompany eliminations from management fees, other underwriting
expenses are adjusted for operating expenses from non-insurance operations
and intercompany eliminations related to the management fees, investment
and other income is adjusted for investment income from non-insurance
operations and capital and surplus and intercompany eliminations for
management fees and intercompany dividends. Finally, the tax adjustment is
the tax on the investment income attributable to capital and surplus. The
reconciliation to GAAP for net income is the net effect of the
reconciliation amounts above.
2000 1999 1998
------------- ------------- -------------
Revenue, excluding net investment income
and realized investment gains:
Property and Casualty $ 67,773,588 $ 63,918,736 $ 65,678,284
Fidelity and Surety 20,369,689 18,908,835 22,948,025
Reinsurance Assumed 41,565 13,533 3,167
------------- ------------- -------------
Totals: $ 88,184,842 $ 82,841,104 $ 88,629,476
============= ============= =============
40
Losses and loss adjustment expenses:
Property and Casualty $ 47,246,293 $ 31,734,367 $ 40,400,269
Fidelity and Surety 11,719,015 13,233,814 11,818,682
Reinsurance Assumed (1,315,504) 493,912 379,732
------------- ------------- -------------
Totals: $ 57,649,804 $ 45,462,093 $ 52,598,683
Reconciliation to Consolidated GAAP:
Inter-company adjustments (148,429) (161,252) (221,569)
------------- ------------- -------------
Consolidated GAAP $ 57,501,375 $ 45,300,841 $ 52,377,114
============= ============= =============
Other underwriting expenses:
Property and Casualty $ 22,867,032 $ 20,509,441 $ 20,226,965
Fidelity and Surety 10,143,105 9,194,086 9,239,049
Reinsurance Assumed (56,283) (58,626) 34,509
------------- ------------- -------------
Totals: $ 32,953,854 $ 29,644,901 $ 29,500,523
Reconciliation to Consolidated GAAP:
(Increase) decrease in deferred insurance acquisition costs (1,082,183) 880,588 662,164
Operating expenses from non-insurance operations 1,704,641 1,510,921 1,466,728
Inter-company adjustments (887,486) (836,827) (946,961)
------------- ------------- -------------
Consolidated GAAP $ 32,688,826 $ 31,199,583 $ 30,682,454
============= ============= =============
Net investment gain and other income:
Property and Casualty $ 7,288,011 $ 5,264,383 $ 6,742,389
Fidelity and Surety 1,082,299 678,678 692,572
Reinsurance Assumed 949,300 714,362 821,247
------------- ------------- -------------
Totals: $ 9,319,610 $ 6,657,423 $ 8,256,208
Reconciliation to Consolidated GAAP:
Investment income from capital and surplus 12,064,331 10,417,802 13,419,217
Investment income from non-insurance operations 146,747 1,276,305 357,244
Inter-company adjustments (207,068) (781,513) 398,411
------------- ------------- -------------
Consolidated GAAP $ 21,323,620 $ 17,570,017 $ 22,431,080
============= ============= =============
Income tax expense (benefit):
Property and Casualty $ 1,187,442 $ 5,356,364 $ 3,652,050
Fidelity and Surety (202,775) (1,151,955) 803,964
Reinsurance Assumed 739,605 70,582 128,293
------------- ------------- -------------
Totals: $ 1,724,271 $ 4,274,991 $ 4,584,307
Reconciliation to Consolidated GAAP:
Capital and surplus 3,140,673 2,923,243 4,091,130
GAAP & inter-company adjustments - - (98,362)
------------- ------------- -------------
Consolidated GAAP $ 4,864,944 $ 7,198,234 $ 8,577,075
============= ============= =============
Net income (loss):
Property and Casualty $ 3,760,832 $ 11,582,947 $ 8,141,389
Fidelity and Surety (207,357) (1,688,432) 1,778,902
Reinsurance Assumed 1,623,047 222,027 281,880
------------- ------------- -------------
Totals: $ 5,176,523 $ 10,116,542 $ 10,202,171
Reconciliation to Consolidated GAAP: 9,276,794 6,595,921 9,221,742
------------- ------------- -------------
Consolidated GAAP $ 14,453,317 $ 16,712,463 $ 19,423,913
============= ============= =============
41
Assets:
Property and Casualty $ 84,545,028 $ 90,756,970 $105,614,860
Fidelity and Surety 40,146,831 24,936,678 20,432,187
Reinsurance Assumed 12,866,324 8,702,723 9,996,577
------------- ------------- -------------
Totals: $137,558,183 $124,396,371 $136,043,624
Reconciliation to Consolidated GAAP:
Capital and surplus 145,699,869 133,226,210 141,315,973
------------- ------------- -------------
Consolidated GAAP $283,258,052 $257,622,581 $277,359,597
============= ============= =============
The Company operates in 37 states, with all business conducted within
the United States. No customer represents greater than 10% of the
Company's revenue. There have been no material intersegment
transactions.
42
SCHEDULE I
CAPITOL TRANSAMERICA CORPORATION
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 2000
SCHEDULE I
CAPITOL TRANSAMERICA CORPORATION
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 2000
Amount at
Which Shown
Fair in Balance
Type of Investment Cost Value Sheet
- - ------------------------------------------------------ ------------------- ------------ ------------
Fixed maturity securities, available-for-sale:
Bonds: 0
United States Government and government 0
agencies and authorities $ 33,930 $ 35,620 $ 35,620
State, municipalities, and political subdivisions 84,236,162 89,732,054 89,732,054
All other corporate bonds 1,099,888 1,074,137 1,074,137
------------------- ------------ ------------
Total 85,369,980 90,841,811 90,841,811
------------------- ------------ ------------
Equity securities, available-for-sale:
Common stocks:
Public utilities 2,065,853 2,129,269 2,129,269
Banks, trusts, and insurance companies 66,009,901 66,983,698 66,983,698
Industrial, miscellaneous, and all other 55,428,457 50,300,571 50,300,571
Nonredeemable preferred stocks 6,470,793 5,516,567 5,516,567
------------------- ------------ ------------
Total 129,975,004 124,930,105 124,930,105
------------------- ------------ ------------
Real estate, net of depreciation 11,008,554 11,008,554 11,008,554
Short-term investments 5,587,306 5,587,306 5,587,306
------------------- ------------ ------------
Total Investments $ 231,940,844 $232,367,776 $232,367,776
=================== ============ ============
43
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CAPITOL TRANSAMERICA CORPORATION
(Parent Company)
CONDENSED BALANCE SHEETS December 31,
- - ------------------------ ------------------------------------------
Assets 2000 1999
------ -------------------------- --------------
Investments $ 9,067,200 $ 7,046,418
Cash 553,169 13,908
Accrued investment income 45,164 47,730
Investment in subsidiaries 134,350,154 124,363,795
Income taxes recoverable 189,696 169,680
Other assets 1,728,997 1,619,474
-------------------------- --------------
Total assets $ 145,934,380 $ 133,261,005
========================== ==============
Liabilities and shareholders' investment
-----------------------------------------
Liabilities:
------------
Accounts payable $ 11,170 $ 30,795
Payable to affiliates - 4,000
Deferred income taxes 223,340 -
-------------------------- --------------
Total liabilities 234,510 34,795
-------------------------- --------------
Shareholders' investment:
Common stock 11,558,767 11,538,970
Additional paid-in-capital 21,995,693 21,857,143
Accumulated other comprehensive (loss) income,
net of deferred taxes 414,771 (37,235)
Retained earnings (including undistributed earnings of
subsidiaries of $132,038,443 and $123,866,985, respectively) 115,544,177 100,389,425
-------------------------- --------------
149,513,408 133,748,303
Less treasury stock, at cost (3,813,538) (522,093)
-------------------------- --------------
Total shareholders' investment 145,699,870 133,226,210
-------------------------- --------------
Total liabilities and shareholders' investment $ 145,934,380 $ 133,261,005
========================== ==============
For the years ended December 31,
-------------------------------------
STATEMENTS OF INCOME 2000 1999 1998
-------------------- ------------ ----------- -----------
Dividends received from subsidiaries $ 5,500,000 $ 500,000 $ 5,000,000
Management fees received from subsidiaries 913,404 906,737 2,031,293
Investment income 253,257 306,874 350,901
Realized investment (losses) gains (107,273) 966,943 13
Other income 4,752 4,052 7,100
------------ ----------- -----------
Total Income 6,564,140 2,684,606 7,389,307
Administrative expenses 1,698,363 1,504,083 1,495,240
------------ ----------- -----------
Net income before tax and equity in undistributed
net income of subsidiaries 4,865,777 1,180,523 5,894,067
Income tax (benefit) expense (258,439) 166,487 346,794
------------ ----------- -----------
Income before equity in undistributed net
income of subsidiaries 5,124,216 1,014,036 5,547,273
Equity in undistributed net income of
subsidiaries, net of dividends paid 9,329,101 15,698,427 13,876,640
------------ ----------- -----------
Net Income $14,453,317 $16,712,463 $19,423,913
============ =========== ===========
The accompanying condensed financial information should be read in
conjunction with the consolidated financial statements and notes thereto of
Capitol Transamerica Corporation.
44
SCHEDULE II
(continued)
CAPITOL TRANSAMERICA CORPORATION
(Parent Company)
December 31,
-------------------------------------------
STATEMENTS OF CASH FLOWS 2000 1999 1998
- - ---------------------------------------------------------- ------------ ------------- --------------
Cash flows provided by operating activities:
Net income $14,453,317 $ 16,712,463 $ 19,423,913
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 792,989 777,657 850,739
Realized investment losses (gains) 107,273 (966,943) (13)
Change in:
Equity in net income of subsidiaries (9,329,101) (15,698,427) (13,876,640)
Other assets (157,451) (131,113) (21,410)
Other liabilities (23,625) (17,476) 6,093
------------ ------------- --------------
Net cash provided by operating activities 5,843,402 676,161 6,382,682
Cash flows provided by (used for) investing activities:
Proceeds from investments sold/matured 94,575 3,559,461 70,022
Purchases of investments (1,527,553) (347,971) (2,367,149)
Purchase of depreciable assets (782,511) (751,534) (1,079,278)
------------ ------------- --------------
Net cash (used for) provided by investing activities (2,215,489) 2,459,956 (3,376,405)
------------ ------------- --------------
Cash flows provided by (used for) financing activities:
Cash dividends paid (3,170,749) (3,166,188) (3,163,880)
Stock options exercised 158,347 67,342 169,265
Net proceeds from (purchase) sale of treasury stock (76,250) (26,534) (18,952)
------------ ------------- --------------
Net cash used for financing activities (3,088,652) (3,125,380) (3,013,567)
Net increase (decrease) in cash 539,261 10,737 (7,290)
Cash, beginning of year 13,908 3,171 10,461
------------ ------------- --------------
Cash, end of year $ 553,169 $ 13,908 $ 3,171
============ ============= ==============
Cash paid during the year for:
Income taxes $ 262,100 $ 337,110 $ 333,917
Interest - - 4,190
The accompanying condensed financial information should be read in
conjunction with the consolidated financial statements and notes thereto of
Capitol Transamerica Corporation.
45
SCHEDULE III
CAPITOL TRANSAMERICA CORPORATION
SUPPLEMENTARY INSURANCE INFORMATION
December 31, Year ended December 31,
---------------------------------------------------------- --------------------------------------
Deferred Future Policy Benefits,
Policy Benefits, Losses, Other Net Claims, Losses
Acquisition Claims, and Unearned Policyholder Premium Investment and Settlement
Segment Costs Loss Expenses Premiums Funds Revenue Income Expenses
- - ----------------- ---------------------------------------------------------- --------------------------------------
2000
- - ----
Property-casualty
insurance $ 13,726,372 $ 77,980,973 $45,587,586 $ - $ 88,184,842 $ 9,163,062 $ 57,501,375
1999
- - ----
Property-casualty
insurance $ 12,644,189 $ 77,256,192 $39,454,257 $ - $ 82,841,104 $ 9,136,244 $ 45,300,841
1998
- - ----
Property-casualty
insurance $ 13,524,777 $ 78,504,050 $41,541,432 $ - $ 88,629,476 $ 9,119,936 $ 52,377,114
Year ended December 31, (continued)
-------------------------------------------
Amortization of
Deferred Policy Other
Acquisition Operating Premiums
Segment Costs Expenses Written
- - ----------------- --------------- ----------- -------------
2000
- - ----
Property-casualty
insurance $ 28,431,941 $ 1,471,512 $ 102,110,215
1999
- - ----
Property-casualty
insurance $ 28,325,677 $ 1,398,483 $ 86,002,801
1998
- - ----
Property-casualty
insurance $ 27,833,262 $ 1,461,640 $ 87,929,152
46
SCHEDULE IV
CAPITOL TRANSAMERICA CORPORATION
REINSURANCE
For The Years Ended December 31, 2000, l999 and l998
Assumed Percentage
Direct Ceded to From Assumed of Amount
Premiums Other Other From Net Assumed
Written Companies Companies Affiliates Amount To Net
------------ ----------- ---------- ----------- ----------- ----------
December 31, 2000
Premiums Written:
Accident and Health insurance $ 293,424 $ 1,940,917 $1,940,917 $ - $ 293,424 661.5%
Property & casualty and
fidelity & surety insurance 99,810,454 6,277,517 65,421 - 93,598,358 0.1%
------------ ----------- ---------- ----------- ----------- ----------
Total premiums written $100,103,878 $ 8,218,434 $2,006,338 $ 0 $93,891,782 2.1%
============ =========== ========== =========== =========== ==========
December 31, 1999
Premiums Written:
Accident and Health insurance $ 289,728 $ 1,493,857 $1,493,857 $ - $ 289,728 515.6%
Property & casualty and
fidelity & surety insurance 84,170,353 4,315,567 48,862 - 79,903,648 0.1%
------------ ----------- ---------- ----------- ----------- ----------
Total premiums written $ 84,460,081 $ 5,809,424 $1,542,719 $ 0 $80,193,376 1.9%
============ =========== ========== =========== =========== ==========
December 31, 1998
Premiums Written:
Accident and Health insurance $ 288,332 $ 1,596,313 $ 270,803 $ 1,325,510 $ 288,332 553.6%
Property & casualty and
fidelity & surety insurance 86,041,340 3,556,866 3,167 - 82,487,641 0.0%
------------ ----------- ---------- ----------- ----------- ----------
Total premiums written $ 86,329,672 $ 5,153,179 $ 273,970 $ 1,325,510 $82,775,973 1.9%
============ =========== ========== =========== =========== ==========
47
SCHEDULE VI
CAPITOL TRANSAMERICA CORPORATION
SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
December 31, 2000
As of December 31,
--------------------------
BALANCE SHEET DATA: 2000 1999
- - ------------------ ------------- -----------
Deferred insurance acquisition costs $ 13,726,372 $12,644,189
Outstanding loss and loss adjustment expense reserves 77,980,973 77,256,192
Discount deducted from reserves - -
Unearned premiums $ 45,587,586 $39,454,257
INCOME STATEMENT DATA: Year Ended December 31,
- - ---------------------- ----------------------------------------
2000 1999 1998
------------- ------------ -----------
Earned premiums $ 88,184,842 $82,841,104 $88,629,476
Net investment income 9,163,062 9,136,244 9,119,936
Incurred losses and loss adjustment
expenses related to:
Current year 60,051,007 47,749,455 49,862,090
Prior years (2,549,632) (2,448,614) 2,515,024
Amortization of deferred policy acquisition costs 28,431,941 28,325,677 27,833,262
Paid claims and claim adjustment expenses 54,456,849 45,325,451 46,405,683
Gross premiums written $102,110,215 $86,002,801 $87,929,152
48
EXHIBIT INDEX
Exhibit No. Description
- ----------- ------------
23 Consent of Ernst & Young LLP, independent auditors.
49