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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q/A
Amendment No. 1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period ended: March 31, 2001 Commission file number: 0-2047
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CAPITOL TRANSAMERICA CORPORATION (CTC)
-----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
A Wisconsin Corporation 39-1052658
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(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
4610 University Avenue
Madison, Wisconsin 53705-0900
- - --------------------------------------- ----------------------
(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
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(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 1934
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 the number of shares of each issuer's class of common stock, as of the
latest practicable date:
At March 31, 2001
Common Stock, $1.00 Par Value
Issued: 11,560,789
Outstanding: 10,949,422
Explanatory Note
----------------
This Amendment No. 1 to the Quarterly Report for the three month period ended
March 31, 2001 of Capitol Transamerica Corporation (the "Company") is being
filed by the Company to amend and restate Part I of the Quarterly Report for the
three month period ended March 31, 2001. 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. 1.
Securities and Exchange Commission
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Washington, D.C.
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Form 10-Q
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Part I
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Financial Information Page
- - --------------------- ----
Consolidated Financial Statements 3 - 7
Notes to Consolidated Financial Statements 8 - 10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 16
Condensed Statutory Financial
Statements of Insurance Subsidiaries 17
2
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31, March 31,
2001 2000 2000
------------ ------------- ------------
ASSETS
Investments:
Available-for sale investment securities, at fair value:
U.S. Government bonds (amortized cost $32,546, $33,930 and
$38,138, respectively) $ 35,003 $ 35,620 $ 39,580
State, municipal and political subdivision bonds (amortized cost
$91,870,973, $84,236,165 and $78,143,564, respectively) 98,440,968 89,732,054 81,758,869
Corporate bonds and notes (amortized cost $1,097,552,
$1,099,888 and $1,121,747, respectively) 1,072,902 1,074,137 1,092,529
Equity securities:
Common stock (cost $124,492,833, $123,504,211 and
$128,276,077, respectively) 116,340,574 119,413,538 119,475,929
Non-redeemable preferred stock (cost $5,844,152, $6,470,793
and $5,440,942, respectively) 5,524,420 5,516,567 4,795,435
Investment real estate, at cost, net of depreciation 11,238,190 11,008,554 10,669,674
Short-term investments, at cost which approximates fair value 1,463,551 5,587,306 3,927,544
------------ ------------- ------------
Total Investments 234,115,608 232,367,776 221,759,560
Cash 1,687,228 3,641,628 1,336,084
Accrued investment income 2,179,448 1,953,466 1,981,287
Receivables from agents, insureds and others, less allowance for
doubtful accounts of $530,000 for each period 19,966,663 18,438,610 16,977,606
Balances due from reinsurers 2,101,339 1,794,851 425,338
Funds held by ceding reinsurers 47,000 47,000 40,000
Deferred insurance acquisition costs 14,035,441 13,726,372 13,064,396
Prepaid reinsurance premiums 1,900,839 1,714,017 1,354,715
Due from securities brokers 35,000 4,218,650 680,452
State income taxes recoverable 58,111 32,263 -
Federal income taxes recoverable - 35,200 -
Deferred income taxes 4,182,345 2,468,713 4,205,197
Other assets 2,780,382 2,819,506 2,747,846
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Total Assets $283,089,404 $ 283,258,052 $264,572,481
============ ============= ============
3
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31, March 31,
2001 2000 2000
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LIABILITIES
Policy liabilities and accruals:
Reserve for losses $ 48,373,798 $ 52,231,685 $ 52,356,662
Reserve for loss adjustment expenses 25,691,370 25,749,288 23,389,541
Unearned premiums 47,321,210 45,587,586 40,802,756
------------- -------------- -------------
Total Policy Liabilities and Accruals 121,386,378 123,568,559 116,548,959
------------- -------------- -------------
Accounts payable 4,248,151 4,203,407 3,834,071
Claim drafts outstanding 4,687,687 4,927,097 2,161,240
Balances due to securities brokers 1,036,891 34,125 357,083
Balances due to reinsurers 5,162,084 4,097,368 2,061,545
Accrued premium taxes 681,298 727,627 316,594
State income taxes payable - - 91,197
Federal income taxes payable 1,376,945 - 1,759,336
------------- -------------- -------------
Total Other Liabilities 17,193,056 13,989,624 10,581,066
------------- -------------- -------------
Total Liabilities 138,579,434 137,558,183 127,130,025
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SHAREHOLDERS' INVESTMENT
Common stock ($1.00 par value, authorized 15,000,000 shares, issued
11,560,789, 11,558,767 and 11,558,166 shares, respectively) 11,560,789 11,558,767 11,558,166
Paid-in surplus 22,743,089 22,733,088 22,727,877
Accumulated other comprehensive (loss) income (net of deferred tax
(benefit) expense of ($673,466), $149,425 and ($2,050,343),
respectively) (1,250,723) 277,504 (3,807,783)
Retained earnings 116,028,503 114,944,048 108,469,296
------------- -------------- -------------
Shareholders' Investment Before Treasury Stock 149,081,658 149,513,407 138,947,556
Treasury stock (611,367, 549,867 and 351,928 shares, respectively,
at cost) (4,571,688) (3,813,538) (1,505,100)
------------- -------------- -------------
Total Shareholders' Investment 144,509,970 145,699,869 137,442,456
------------- -------------- -------------
Total Liabilities and Shareholders' Investment $283,089,404 $ 283,258,052 $264,572,481
============= ============== =============
Book Value Per Share $ 13.20 $ 13.23 $ 12.26
============= ============== =============
Shares Outstanding 10,949,422 11,008,900 11,206,238
============= ============== =============
4
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months
Ended March 31,
--------------------------
2001 2000
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REVENUES
Premiums earned $22,842,813 $20,666,549
Net investment income 2,453,781 2,258,601
Realized investment (losses) gains (1,822,488) 1,046,508
Other revenues 126,218 71,404
------------ ------------
Total Revenues 23,600,324 24,043,062
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LOSSES AND EXPENSES INCURRED
Losses incurred 9,633,350 5,928,036
Loss adjustment expenses incurred 2,622,424 1,911,201
Underwriting, acquisition and insurance expenses 8,841,479 8,005,872
Increase in deferred insurance acquisition costs (309,069) (420,207)
Other expenses 359,823 343,877
------------ ------------
Total Losses and Expenses Incurred 21,148,007 15,768,779
------------ ------------
Income Before Income Taxes 2,452,317 8,274,283
------------ ------------
Income tax expense (benefit):
Current 1,442,586 2,728,463
Deferred (890,740) (135,059)
------------ ------------
551,846 2,593,404
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Net Income $ 1,900,471 $ 5,680,879
============ ============
Per Share Data:
Cash Dividends Declared $ 0.08 $ 0.07
============ ============
Earnings Per Share - Basic $ 0.17 $ 0.50
============ ============
Earnings Per Share - Diluted $ 0.17 $ 0.50
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5
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, 1999 $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-salesecurities, 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-salesecurities, 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)
Comprehensive income (loss):
Net income - - 1,900,471 - 1,900,471 -
-------------
Other comprehensive loss:
Unrealized depreciation on available-
for-sale securities, net of
deferred taxes - - (2,712,844) - - -
Less: reclassification adjustment,
net of tax of $637,871, for gain
included in net income - - 1,184,617 - - -
-------------
Other comprehensive loss - - (1,528,227) (1,528,227) - -
-------------
Comprehensive loss - - 372,244 - - -
Stock options exercised 2,022 10,001 - - - -
Stock-based compensation - - - - 62,195 -
Purchases and sales of treasury
stock, net - - - - - (758,150)
Cash dividends paid - - - - (878,211) -
------------ ----------- ------------- ------------- ------------- ------------
Balance, March 31, 2001 $11,560,789 $22,743,089 - ($1,250,723) $116,028,503 ($4,571,688)
============ =========== ============= ============= ============= ============
6
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year-to-date
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March 31, December 31, March 31,
2001 2000 2000
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Cash flows provided by (used for) operating activities:
- - -------------------------------------------------------
Net Income $ 1,900,471 $ 14,453,317 $ 5,680,879
Adjustments to reconcile net income to net cash provided by (used
for) operating activities:
Depreciation 302,678 1,215,024 270,830
Realized investment gains 1,822,488 (11,805,350) (1,046,508)
Change in:
Deferred insurance acquisition costs (309,069) (1,082,183) (420,207)
Unearned premiums 1,733,624 6,133,329 1,348,499
Accrued investment income (225,982) (25,565) (53,386)
Receivables from agents, insureds and others (1,528,053) (3,545,963) (2,084,959)
Balances due to/from reinsurers 754,663 149,564 153,792
Reinsurance recoverable on paid and unpaid losses 3,565 683,248 12,710
Funds held by ceding reinsurers - (7,000) -
Income taxes payable/recoverable 1,386,297 618,777 2,536,773
Deferred income taxes (890,741) (598,340) (135,056)
Due to/from securities brokers 5,186,416 (3,545,389) 315,767
Prepaid reinsurance premiums (186,822) (426,390) (67,088)
Other assets (3,006) (707,858) (677,371)
Reserve for losses and loss adjustment expenses (3,915,805) 724,781 (1,509,989)
Accounts payable (194,666) 3,324,905 189,712
Accrued premium taxes (46,329) 388,764 (22,269)
------------ -------------- ------------
Net cash provided by operating activities 5,789,729 5,947,671 4,492,129
------------ -------------- ------------
Cash flows provided by (used for) investing activities:
- - -------------------------------------------------------
Proceeds from sales of available-for-sale securities 895,770 26,278,568 2,599,193
Purchases of available-for-sale securities (7,797,800) (26,716,842) (6,815,685)
Maturities of available-for-sale securities 851,766 4,053,867 1,724,072
Purchases of depreciable assets (131,722) (782,511) (124,812)
------------ -------------- ------------
Net cash (used for) provided by investing activities (6,181,986) 2,833,082 (2,617,232)
------------ -------------- ------------
Cash flows (used for) provided by financing activities:
- - -------------------------------------------------------
Cash dividends paid (878,211) (3,111,938) (788,776)
Stock options exercised 12,003 45,273 76,285
Net cost of purchase of treasury stock (695,935) (3,152,895) (906,757)
------------ -------------- ------------
Net cash used for financing activities (1,562,143) (6,219,560) (1,619,248)
------------ -------------- ------------
Net (decrease) increase in cash (1,954,400) 2,561,193 255,649
Cash, beginning of period 3,641,628 1,080,435 1,080,435
------------ -------------- ------------
Cash, end of period $ 1,687,228 $ 3,641,628 $ 1,336,084
============ ============== ============
Cash paid during the period for:
Income taxes $ 1,024,021 $ 4,856,364 $ 1,713,260
============ ============== ============
7
CAPITOL TRANSAMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(1) Basis of Presentation
-----------------------
The condensed financial statements included herein of Capitol Transamerica
Corporation (the "Company"), other than the Consolidated Balance Sheet at
December 31, 2000, and the Consolidated Statement of Shareholders'
Investment and Comprehensive Income (Loss) and the Consolidated Statement
of Cash Flows as of December 31, 2000, have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations.
Although the Company believes the disclosures are adequate to make the
information presented not misleading, it is suggested that these condensed
financial statements be read in conjunction with the financial statements
and the notes thereto included in the Company's 2000 annual report on Form
10-K.
(2) Earnings Per Share
--------------------
Basic earnings per share is computed by dividing net income by the weighted
average number of shares of stock outstanding during the period. Diluted
earnings 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 earnings per share (EPS):
March 31, December 31, March 31,
2001 2000 2000
----------- ------------- -----------
Numerator:
- - ----------
Consolidated net income $ 1,900,471 $ 14,453,317 $ 5,680,879
=========== ============= ===========
Denominator:
- - ------------
Basic EPS - weighted average shares of common stock 11,050,244 11,124,074 11,257,512
Effect of dilutive securities - unexercised stock options 46,698 34,388 37,721
----------- ------------- -----------
Diluted EPS - weighted average shares of common
stock and unexercised stock options 11,096,942 11,158,462 11,295,233
=========== ============= ===========
(3) 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, includes unrealized gains and losses, net of income
tax effects, on certain investments in debt and equity securities.
Comprehensive income (loss) is reported by the Company in the Consolidated
Statements of Shareholders' Investment and Comprehensive Income (Loss).
(4) Income Taxes
-------------
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial
statement purposes and the corresponding amounts used for income tax
reporting.
(5) Common Stock Options
----------------------
There were 2,022 options exercised during the three months ended March 31,
2001 compared to 19,196 options exercised during the three months ended
March 31, 2000. For further information regarding stock options, refer to
Note 6 of the Notes to the Consolidated Financial Statements included in
the Company's 2000 annual report.
8
(6) Dividends
---------
2001
----
On February 27, 2001, a cash dividend of $.08 per share was declared to
shareholders of record March 9, 2001 and paid March 23, 2001 in the amount
of $878,211.
2000
----
On November 21, 2000, a cash dividend of $.07 per share was declared to
shareholders of record December 8, 2000 and paid December 20, 2000 in the
amount of $773,304.
On September 5, 2000, a cash dividend of $.07 per share was declared to
shareholders of record September 15, 2000 and paid September 26, 2000 in
the amount of $773,993.
On May 30, 2000, a cash dividend of $.07 per share was declared to
shareholders of record June 16, 2000 and paid June 28, 2000 in the amount
of $775,865.
On February 18, 2000, a cash dividend of $.07 per share was declared to
shareholders of record March 10, 2000 and paid March 23, 2000 in the amount
of $788,776.
(7) Investments
-----------
The Company's fixed maturities and equity securities are classified as
available-for-sale and, accordingly, are carried at fair value, with
unrealized gains (losses) reported as a separate component of the
shareholders' investment, net of taxes. The cost of fixed maturities is
adjusted for the 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 $1,722,517, $1,595,693 and $1,274,060 at March 31, 2001, December 31,
2000 and March 31, 2000, respectively. Real estate is depreciated over the
useful life of the asset.
The cost of investments sold is determined under the specific
identification method.
(8) Contingent Liabilities
-----------------------
The Company is a defendant in certain lawsuits involving complaints which
demand damages and recoveries for claims and losses allegedly related to
risks insured by the Company. Management's opinion is that such lawsuits
are a result of the ordinary course of business in the insurance industry.
The reserve for losses includes management's estimates of the probable
ultimate cost of settling all losses involving lawsuits.
9
(9) 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. Data for
each segment as required for interim reporting 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 two
sources: investment income on capital and surplus and intercompany
eliminations (management fees for intercompany services provided and
dividend income on stock held by affiliates). Specifically, revenues are
adjusted for investment income from capital and surplus, and intercompany
eliminations for management fees from intercompany service agreements and
intercompany dividends. Pre-tax profit is adjusted for the net effect of
the amounts in revenues along with intercompany eliminations for management
fees from expense items (loss adjustment and underwriting expenses).
Year-to-date
-------------------------------------------
March 31, December 31, March 31,
2001 2000 2000
-------------- -------------- -----------
Total Revenues:
Property & Casualty $ 18,337,935 $ 75,061,599 $17,195,635
Fidelity & Surety 4,748,203 21,451,988 4,754,952
Reinsurance Assumed 51,544 990,865 152,475
-------------- -------------- -----------
Total $ 23,137,682 $ 97,504,452 $22,103,062
============== ============== ===========
Before-tax Profit (Loss):
Property & Casualty $ 1,638,804 $ 4,948,274 $ 2,982,772
Fidelity & Surety (743,957) (410,132) 2,044,964
Reinsurance Assumed 1,001,038 2,362,652 1,023,635
-------------- -------------- -----------
Subtotal $ 1,895,885 $ 6,900,794 $ 6,051,371
Reconciliation to Consolidated GAAP:
Capital & Surplus 2,584,012 12,064,331 1,821,154
Inter-company adjustments (2,027,580) 353,136 401,758
-------------- -------------- -----------
Consolidated Net Income Before Tax $ 2,452,317 $ 19,318,261 $ 8,274,283
============== ============== ===========
10
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
OVERVIEW
- --------
Capitol Transamerica Corporation (the "Company") is an insurance holding
company, which operates in 37 states and writes, through its subsidiaries, both
property-casualty and fidelity-surety insurance. The property-casualty segment
accounts for approximately 77% of the business written while the fidelity-surety
segment accounts for approximately 23% of the business.
The underwriting cycles of the property-casualty insurance industry have been
characterized by peak periods of adequate rates, underwriting profits and lower
combined ratios, with the down side of the cycles being characterized by
inadequate rates, underwriting losses and 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 a concern for the Company and the
property-casualty insurance industry as a whole. Management feels strongly that
rate regulators have been slow to adjust rates in response to increased claim
costs from the factors noted above. This, when combined with increased
competition in the Company's niche market, has presented an unprecedented
challenge to management. The Company has responded to this challenge with
increased marketing efforts as well as the addition of innovative programs and
alliances that should position the Company for continued expansion and
profitability.
OPERATING RESULTS
- ------------------
Total revenues decreased by approximately $442,738, or approximately 2%, for the
three months ended March 31, 2001 compared to the same period in 2000 due
primarily to realized investment losses. Underwriting income decreased by
approximately $3.1 million for the three months ended March 31, 2001 compared to
the same period in 2000 due primarily to increased loss and loss adjustment
expenses. Net income decreased to $1.9 million for the three months ended March
31, 2001 compared to $5.7 million for the same period in 2000. A more detailed
analysis of the Company's results of operations follows.
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 the three months ended March 31, 2001 compared to the three months ended
March 31, 2000 and the twelve months ended December 31, 2000.
Three Months Twelve Months
Three Months Ended Ended Ended
March 31, 2001 March 31, 2000 December 31, 2000
--------------------------- -------------------------- ------------------------- -------------------------
Gross Premiums Written $27,573,255 $23,364,959 $102,110,215
Reinsurance Ceded 3,183,640 1,416,999 8,218,433
--------------------------- -------------------------- ------------------------- -------------------------
Net Premiums Written $24,389,615 $21,947,960 $93,891,782
=========================== ========================== ========================= =========================
Net Premiums Earned $22,842,813 $20,666,549 $88,184,842
=========================== ========================== ========================= =========================
Net Unearned Premium
Reserve $47,321,210 $40,802,756 $45,587,586
=========================== ========================== ========================= =========================
11
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. For the three months ended
March 31, 2001 compared to the same period in 2000, the Company reduced its
gross written premiums in the fidelity-surety bond market by approximately 11%
due almost entirely to decreases in volume. The Company increased its gross
written premiums in the property-casualty market by approximately 24%, of which
approximately 10% of the increase in gross written premiums was due to rate
increases with the remainder coming from volume increases. For the three months
ended March 31, 2001 compared to the same period in 2000, the Company increased
its gross written premiums across all lines by approximately 17.0%, of which
approximately 8% is attributable to rate increases with the remainder being due
to volume increases.
For the three months ended March 31, 2001, the fidelity-surety loss and loss
adjustment expense ratio was 63.7% of net earned premium compared to 13.5% of
net earned premiums for the same period in 2000. This increase is due to two
factors. First, the ratio for the three months ended March 31, 2000 is low
compared to the Company's history of approximately 55% of net premiums earned,
and, second, claims from one specific bonded contractor accounted for
approximately 33% of the fidelity-surety losses and loss adjustment expenses for
the three months ended March 31, 2001. To prevent additional losses, the Company
has stopped writing new bonds with this contractor as well as canceling the
agents responsible for the production of this and other unprofitable business.
Had the fidelity-surety losses discussed above not occurred, the Company's
fidelity-surety loss and loss adjustment expense ratio would have been 55% and
its overall loss and loss adjustment expense ratio would have been 53%.
Operating expenses remained relatively constant for the three months ended March
31, 2001 compared to the same period in 2000 climbing slightly from a ratio of
38.0% to 38.4%. The deferred acquisition costs reduced the operating expenses
1.4% of net premiums earned for the three months ended March 31, 2001 compared
to a reduction of 2.0% of net earned premiums for the three months ended March
31, 2000. This reduction is due primarily to two factors. First, the increase in
deferred acquisition costs, which is a reduction of operating expenses, is
$111,138 less for the three months ended March 31, 2001 compared to the same
period last year. Second, the net earned premiums grew by over $2 million
compared to the same period in 2000.
The Company regularly reviews its calculation of deferred acquisition costs to
ensure that the portion of underwriting expenses that should be deferred
appropriately matches the premiums that have yet to be earned. As a result of
this analysis, the Company determined that the amount of resources, such as
salaries and rent, allocable to the premiums yet to be earned needed to be
adjusted downward because the amount of resources used to produce this business
compared to the prior year is less when taken in conjunction with the resources
used for the remainder of the Company's operations. This downward adjustment,
when coupled with the higher premiums, caused the lower ratio applicable to the
deferred acquisition costs described above.
The Company's operating results from underwriting operations can be measured by
the combined loss, loss adjustment expense 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. In other words, it reflects 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 the three months ended March 31, 2001 compared
with the same period in 2000 and the year ended December 31, 2000 broken down
into its loss and operating expense components on a GAAP basis.
12
Three Months Three Months Twelve Months Ended
Ended Ended December 31,
March 31, 2001 March 31, 2000 2000
- ----------------------------- --------------------------- --------------------------- ---------------------------
Loss & Loss Adjustment Exp. 53.7% 37.9% 65.2%
Operating Expenses 38.4% 38.0% 36.7%
- ----------------------------- --------------------------- --------------------------- ---------------------------
Combined Ratio 92.1% 75.9% 101.9%
============================= =========================== =========================== ===========================
Investment income has been increasing due to the Company concentrating on
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:
Three Months Three Months Twelve Months Ended
Ended Ended December 31,
March 31, 2001 March 31, 2000 2000
- ---------------------------------------------- ---------------------- ---------------------- ----------------------
Fixed Maturities (at amortized cost) 93,001,071 79,303,449 85,369,980
- ---------------------------------------------- ---------------------- ---------------------- ----------------------
Net Investment Income 2,453,781 2,258,601 9,163,062
============================================== ====================== ====================== ======================
The Company sells investments, and, thus, realizes investment gains, when it is
advantageous to the Company within the marketplace. The investment gains
realized, or market value of the investments sold compared to the Company's cost
of those investments, fluctuates with both the market conditions when the
investment is sold and the Company's management of its portfolio. Additionally,
under FASB Statement 115, the Company absorbed $2.0 million in realized losses
for the three months ended March 31, 2001 for "other-than-temporary" market
value adjustments for certain securities held in its portfolio. No such
adjustments were made during the same period during 2000. Management continues
to monitor its investment portfolio for other securities that could potentially
fall into this category in the future. Had the FASB 115 losses not occurred, the
Company's realized gains would have amounted to $0.2 million for the three
months ended March 31, 2001 compared to $1.0 million for the same period in 2000
and $11.8 million for the full year of 2000.
The Company's income tax expense has decreased from $2.6 million for the three
months ended March 31, 2000 to $0.6 million for the same period in 2001 for two
reasons. First, income from underwriting operations has decreased, and, second,
the Company's increased investment in municipal bonds has decreased the amount
of taxable income.
13
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
severe 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 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.
March 31, December 31, March 31,
Investments 2001 2000 2000
- - -------------------------------------------------- ------------- -------------- -------------
Invested Assets $234,115,608 $ 232,367,776 $221,759,560
Net Investment Income 2,453,781 9,163,062 2,258,601
Percent of Return to Average Carrying Value 4.2% 4.0% 4.0%
Realized (Losses) Gains (1,822,488) 11,805,350 1,046,508
Change in Unrealized (Losses) Gains (1,528,227) 4,239,902 154,615
- - -------------------------------------------------- ------------- -------------- -------------
The net unrealized loss of $1.5 million for the first three months of 2001
consists of a $0.7 million unrealized gain on fixed maturities and a $2.2
million unrealized loss on the Company's equity portfolio. Management has begun
to increase its tax-free bond holdings and de-emphasize the equity portfolio,
but is optimistic that the recent downturn in the value of its equity
investments is temporary and that the current market conditions will provide an
even greater opportunity to invest and build shareholder value over the long
term.
For the three months ended March 31, 2001, net investment income increased from
$2.3 million to $2.5 million, or 8.6%, over the same period last year. The
Company holds a large percentage of equity investments, which results in a
comparatively lower rate of return on invested assets than other
property-casualty insurance companies.
Please see the Operating Results section for a discussion of the losses absorbed
in 2001 for "other-than-temporary" investment losses under FASB Statement 115.
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 the discounting of claims reserves for
tax purposes. Deferred taxes are also provided on unrealized gains and losses.
Also of note is that the Company's effective income tax rate tends to be lower
than most companies because of the high concentration of investment income
related to tax-free municipal bonds.
14
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 $74.1 million at March 31, 2001, compared to $75.7
million at March 31, 2000. These reserves remain relatively constant due to the
Company having a high level of loss and loss adjustment expense payments during
the first quarter compared to the first quarter of last year, $15.9 million
compared to $9.0 million. Management continues to closely monitor the loss and
loss adjustment expense reserves to assure adequate recognition of the ultimate
liability for claims and claims expenses. Management recognizes that this is
especially important in light of today's climate whereby the Company has had
increased premium volume and larger than expected contract bond payments in the
Florida and Texas markets.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
Liquidity refers to the Company's ability to meet obligations as they become
due. The obligations and cash outflows of the Company include claim settlements,
acquisition and administrative expenses, investment purchases and dividends to
shareholders. In addition to satisfying obligations and cash outflows through
premium collections, there are cash inflows obtained from interest and dividend
income, and maturities and sales of investments. Because cash inflows from
premiums are received in advance of the cash outflows required to settle claims,
the Company accumulates funds, which it invests pending liquidity requirements.
Therefore, investments represent the majority (82.7%, 82.0% and 83.8% at March
31, 2001, December 31, 2000 and March 31, 2000, respectively) of the Company's
assets. Cash outflows can be unpredictable for two reasons: first, a large
portion of liabilities representing loss reserves have uncertainty regarding
settlement dates; and second, there is a 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 programs are 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 requirements.
SEGMENT INFORMATION
- -------------------
The Company has three business segments, which are segregated based on the types
of products and services provided. These 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 is in footnote 9
to the Financial Statements for the three month periods ended March 31, 2001 and
2000 and the year ended December 31, 2000.
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, deer hunters 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. The reinsurance assumed business had a net underwriting loss of
$25,000. Discontinued reinsurance assumed had an underwriting loss of $60,000
for the three months ended March 31, 2001, compared to underwriting income of
$871,000 for the same period in 2000. For the three months ended March 31, 2001,
the Company decreased IBNR reserves by $1 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 $129,000, which is consistent with the amounts
reported for the comparable period in 2000. In addition to the discontinued
reinsurance assumed, the Company is involved in active reinsurance assumed
business, which has a minimal effect on the overall underwriting operations of
the Company, contributing underwriting income of $34,000 and $7,000 for the
three months ended March 31, 2001 and March 31, 2000, respectively.
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 and 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.
15
STATUTORY UNDERWRITING RESULTS
- ------------------------------
The financial statements of the insurance subsidiaries have been prepared in
accordance with accounting principles prescribed or permitted by insurance
regulatory authorities (statutory basis), which differ in certain respects from
accounting principles generally accepted in the United States. The Company's
underwriting results can be measured by the combined loss and expense ratios on
a statutory basis. Losses and loss adjustment expenses are stated as a ratio of
net premiums earned, while underwriting expenses are stated as a ratio of net
premiums written. See the Operating Results section for a discussion on the
significance of the combined ratios. The following table depicts the Company's
two subsidiary insurance companies' combined ratios on a statutory basis.
Three Months Three Months Twelve Months Ended
Ended Ended December 31,
March 31, 2001 March 31, 2000 2000
- ---------------------------------- --------------------- ---------------------- ---------------------
Loss & Loss Adjustment Exp. 53.8% 38.1% 65.4%
Underwriting Expense 36.7% 37.3% 35.1%
- ---------------------------------- --------------------- ---------------------- ---------------------
Combined Ratio 90.5% 75.4% 100.5%
================================== ===================== ====================== =====================
The Company's combined ratios on a statutory basis continue to compare very
favorably with the industry average on a statutory basis, as indicated below.
Three Months Three Months Twelve Months Ended
Combined Ratio Ended Ended December 31,
March 31, March 31, 2000 2000
2001
- --------------------------- --------------------------------- -------------------------- ----------------------
Company 90.5% 75.4% 100.5%
Industry* N/A 110.2% 110.4%
- --------------------------- --------------------------------- -------------------------- ----------------------
*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.
SAFE HARBOR STATEMENT
- -----------------------
Some of the statements in this report, as well as statements by the Company in
periodic press releases and oral statements made by the Company's officials to
analysts and shareholders in the course of presentations about the Company,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, estimates subject to change 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.
16
INSURANCE SUBSIDIARY FINANCIAL STATEMENTS
STATUTORY BASIS AS REPORTED TO STATE REGULATORY AUTHORITIES
CAPITOL INDEMNITY CORPORATION
- - ----------------------------- March 31, December 31, March 31,
BALANCE SHEETS 2001 2000 2000
- - ------------------------------------------------------ ------------- -------------- -------------
ASSETS
Cash and Invested Assets $220,343,950 $ 220,326,616 $208,966,442
Other Assets 28,636,890 24,911,537 19,925,954
- - ------------------------------------------------------ ------------- -------------- -------------
Total Assets $248,980,840 $ 245,238,153 $228,892,396
====================================================== ============= ============== =============
LIABILITIES
Reserves for Losses and Loss Adjustment Expenses $ 76,486,936 $ 80,127,074 $ 75,910,827
Unearned Premiums 45,420,371 43,873,569 39,448,041
Other Liabilities 13,372,670 13,320,126 17,075,160
- - ------------------------------------------------------ ------------- -------------- -------------
Total Liabilities 135,279,977 137,320,769 132,434,028
- - ------------------------------------------------------ ------------- -------------- -------------
SURPLUS AS REGARDS POLICYHOLDERS
Shareholders' Equity 113,700,863 107,917,384 96,458,368
- - ------------------------------------------------------ ------------- -------------- -------------
Total Liabilities and Capital $248,980,840 $ 245,238,153 $228,892,396
====================================================== ============= ============== =============
STATEMENTS OF INCOME
Premiums Earned $ 22,842,813 $ 88,184,842 $ 20,666,549
Underwriting Deductions 20,924,007 90,802,716 16,230,102
- - ------------------------------------------------------ ------------- -------------- -------------
Net Underwriting Gain (Loss) 1,918,806 (2,617,874) 4,436,447
- - ------------------------------------------------------ ------------- -------------- -------------
Investment Income Including Sales 524,377 20,845,091 3,183,553
Other Income 137,306 396,399 74,115
Dividends to Policyholders 347,365 489,085 -
Income Tax Expense 560,313 5,131,195 2,551,857
- - ------------------------------------------------------ ------------- -------------- -------------
Net Income $ 1,672,811 $ 13,003,336 $ 5,142,258
====================================================== ============= ============== =============
CAPITOL SPECIALTY INSURANCE CORPORATION
- - ---------------------------------------
BALANCE SHEETS
- - ----------------------------------------------------------------------------------------------------
ASSETS
Cash and Invested Assets $ 4,576,422 $ 4,474,294 $ 4,309,467
Other Assets 176,757 201,378 185,595
- - ------------------------------------------------------ ------------- -------------- -------------
Total Assets $ 4,753,179 $ 4,675,672 $ 4,495,062
====================================================== ============= ============== =============
LIABILITIES
Liabilities Other Than For Insurance Obligations 7,709 7,709 7,712
- - ------------------------------------------------------ ------------- -------------- -------------
Total Liabilities 7,709 7,709 7,712
- - ------------------------------------------------------ ------------- -------------- -------------
SURPLUS AS REGARDS POLICYHOLDERS
Shareholders' Equity 4,745,470 4,667,963 4,487,350
- - ------------------------------------------------------ ------------- -------------- -------------
Total Liabilities and Capital $ 4,753,179 $ 4,675,672 $ 4,495,062
====================================================== ============= ============== =============
STATEMENTS OF INCOME
Underwriting Deductions 1,893 6,278 2,615
- - ------------------------------------------------------ ------------- -------------- -------------
Net Underwriting Gain (1,893) (6,278) (2,615)
- - ------------------------------------------------------ ------------- -------------- -------------
Investment Income Including Sales 51,401 249,300 71,322
Income Tax Expense 3,348 10,634 7,714
- - ------------------------------------------------------ ------------- -------------- -------------
Net Income $ 46,160 $ 232,388 $ 60,993
====================================================== ============= ============== =============
17
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of amendment to the
Securities and Exchange Act of 1934, 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 and President
By: /s/ Paul J. Breitnauer
---------------------------------------------
Paul J. Breitnauer
Vice President and Treasurer
18