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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: June 30, 2001 Commission file number: 0-2047
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CAPITOL TRANSAMERICA CORPORATION (CTC)
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(Exact name of registrant as specified in its charter)
A Wisconsin Corporation 39-1052658
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(State or other jurisdiction of (I.R.S. Employer
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
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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
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Indicate the number of shares of each issuer's class of common stock, as of the
latest practicable date:
At June 30, 2001
Common Stock, $1.00 Par Value
Issued: 11,560,970
Outstanding: 10,950,403
Explanatory Note
----------------
This Amendment No. 1 to the Quarterly Report for the three month period ended
June 30, 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 June 30, 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
------
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
June 30, December 31, June 30,
2001 2000 2000
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ASSETS
Investments:
Available-for sale investment securities, at fair value:
U.S. Government bonds (amortized cost $27,728, $33,930 and
$36,729, respectively) $ 30,007 $ 35,620 $ 38,158
State, municipal and political subdivision bonds (amortized cost
$94,845,487, $84,236,165 and $77,472,800, respectively) 99,652,064 89,732,054 80,912,733
Corporate bonds and notes (amortized cost $1,095,190,
$1,099,888 and $1,119,485, respectively) 1,071,657 1,074,137 1,091,332
Equity securities:
Common stock (cost $112,753,050, $123,504,211 and
$125,727,134, respectively) 116,990,647 119,413,538 114,456,520
Non-redeemable preferred stock (cost $5,344,152, $6,470,793
and $5,809,582, respectively) 5,194,659 5,516,567 5,006,663
Investment real estate, at cost, net of depreciation 11,385,595 11,008,554 10,800,128
Short-term investments, at cost which approximates fair value 6,249,395 5,587,306 2,398,329
------------ ------------- ------------
Total Investments 240,574,024 232,367,776 214,703,863
Cash 4,569,659 3,641,628 1,121,753
Accrued investment income 2,066,163 1,953,466 1,834,048
Receivables from agents, insureds and others, less allowance for
doubtful accounts of $530,000 for each period 24,307,358 18,438,610 20,393,815
Balances due from reinsurers 1,638,394 1,794,851 1,303,352
Funds held by ceding reinsurers 47,000 47,000 40,000
Deferred insurance acquisition costs 15,024,286 13,726,372 14,060,118
Prepaid reinsurance premiums 2,304,716 1,714,017 1,558,020
Due from securities brokers 1,198,000 4,218,650 6,989,479
State income taxes recoverable 105,919 32,263 -
Federal income taxes recoverable 2,203,577 35,200 -
Deferred income taxes - 2,468,713 4,973,709
Other assets 2,503,142 2,819,506 3,044,207
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Total Assets $296,542,238 $ 283,258,052 $270,022,364
============ ============= ============
3
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31, June 30,
2001 2000 2000
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LIABILITIES
Policy liabilities and accruals:
Reserve for losses $ 51,659,083 $ 52,231,685 $ 54,279,583
Reserve for loss adjustment expenses 25,741,871 25,749,288 23,578,052
Unearned premiums 53,589,577 45,587,586 45,540,141
------------- -------------- -------------
Total Policy Liabilities and Accruals 130,990,531 123,568,559 123,397,776
------------- -------------- -------------
Accounts payable 3,638,222 4,203,407 3,380,360
Claim drafts outstanding 5,987,411 4,927,097 3,766,846
Balances due to securities brokers 401,500 34,125 201,633
Balances due to reinsurers 5,792,798 4,097,368 1,642,391
Accrued premium taxes 717,447 727,627 441,924
State income taxes payable - - 48,681
Federal income taxes payable - - 343,036
Deferred income taxes 418,771 - -
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Total Other Liabilities 16,956,149 13,989,624 9,824,871
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Total Liabilities 147,946,680 137,558,183 133,222,647
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SHAREHOLDERS' INVESTMENT
Common stock ($1.00 par value, authorized 15,000,000 shares, issued
11,560,970, 11,558,767 and 11,558,166 shares, respectively) 11,560,970 11,558,767 11,558,166
Paid-in surplus 22,744,662 22,733,088 22,727,877
Accumulated other comprehensive income (loss) (net of deferred tax
expense (benefit) of $3,105,699, $149,425 and ($3,031,113),
respectively) 5,767,728 277,504 (5,629,211)
Retained earnings 113,083,886 114,944,048 111,085,182
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Shareholders' Investment Before Treasury Stock 153,157,246 149,513,407 139,742,014
Treasury stock (610,567, 549,867 and 476,152 shares, respectively,
at cost) (4,561,688) (3,813,538) (2,942,297)
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Total Shareholders' Investment 148,595,558 145,699,869 136,799,717
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Total Liabilities and Shareholders' Investment $296,542,238 $ 283,258,052 $270,022,364
============= ============== =============
Book Value Per Share $ 13.57 $ 13.23 $ 12.34
============= ============== =============
Shares Outstanding 10,950,403 11,008,900 11,082,014
============= ============== =============
4
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Six Months For the Three Months
Ended June 30, Ended June 30,
-------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------- ------------
REVENUES
Premiums earned $47,320,300 $42,080,648 $ 24,477,487 $21,414,099
Net investment income 4,843,119 4,502,403 2,389,338 2,243,802
Realized investment (losses) gains (1,748,074) 3,978,978 74,414 2,932,470
Other revenues 267,584 157,413 141,366 86,009
------------ ------------ ------------- ------------
Total Revenues 50,682,929 50,719,442 27,082,605 26,676,380
------------ ------------ ------------- ------------
LOSSES AND EXPENSES INCURRED
Losses incurred 28,094,100 17,127,494 18,460,750 11,199,458
Loss adjustment expenses incurred 5,495,667 4,918,748 2,873,243 3,007,547
Underwriting, acquisition and insurance expenses 18,796,536 16,441,863 9,955,057 8,435,991
Increase in deferred insurance acquisition costs (1,297,914) (1,415,929) (988,845) (995,722)
Other expenses 719,057 705,708 359,234 361,831
------------ ------------ ------------- ------------
Total Losses and Expenses Incurred 51,807,446 37,777,884 30,659,439 22,009,105
------------ ------------ ------------- ------------
(Loss) Income Before Income Taxes (1,124,517) 12,941,558 (3,576,834) 4,667,275
------------ ------------ ------------- ------------
Income tax (benefit) expense:
Current (742,145) 3,791,729 (2,184,731) 1,063,266
Deferred (68,790) 77,199 821,950 212,258
------------ ------------ ------------- ------------
(810,935) 3,868,928 (1,362,781) 1,275,524
------------ ------------ ------------- ------------
Net (Loss) Income ($313,582) $ 9,072,630 ($2,214,053) $ 3,391,751
============ ============ ============= ============
Per Share Data:
Cash Dividends Declared $ 0.16 $ 0.14 $ 0.08 $ 0.07
============ ============ ============= ============
Earnings Per Share - Basic ($0.03) $ 0.81 ($0.20) $ 0.30
============ ============ ============= ============
Earnings Per Share - Diluted ($0.03) $ 0.81 ($0.20) $ 0.30
============ ============ ============= ============
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-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)
Comprehensive (loss) income:
Net loss - - (313,582) - (313,582) -
--------------
Other comprehensive income:
Unrealized appreciation on
available-for-sale securities,
net of deferred taxes - - 4,353,976 - - -
Less: reclassification adjustment,
net of tax of $611,826, for
gain included in net income - - 1,136,248 - - -
--------------
Other comprehensive income - - 5,490,224 5,490,224 - -
--------------
Comprehensive income - - 5,176,642 - - -
Stock options exercised 2,203 11,574 - - - -
Stock-based compensation - - - - 207,224 -
Purchases and sales of treasury
stock, net - - - - - (748,150)
Cash dividends paid - - - - (1,753,804) -
------------ ------------ -------------- --------------- ------------- ------------
Balance, June 30, 2001 $11,560,970 $ 22,744,662 - $ 5,767,728 $113,083,886 ($4,561,688)
============ ============ ============== =============== ============= ============
6
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
Year-to-date
--------------------------------------------
June 30, December 31, June 30,
2001 2000 2000
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Cash flows (used for) provided by operating activities:
- - -------------------------------------------------------
Net Income ($313,582) $ 14,453,317 $ 9,072,630
Adjustments to reconcile net income to net cash provided by (used
for) operating activities:
Depreciation 611,836 1,215,024 583,576
Realized investment gains 1,748,074 (11,805,350) (3,978,978)
Change in:
Deferred insurance acquisition costs (1,297,914) (1,082,183) (1,415,929)
Unearned premiums 8,001,991 6,133,329 6,085,884
Accrued investment income (112,697) (25,565) 93,853
Receivables from agents, insureds and others (5,868,748) (3,545,963) (5,501,169)
Balances due to/from reinsurers 471,630 149,564 310,137
Reinsurance recoverable on paid and unpaid losses 1,380,257 683,248 (1,440,802)
Funds held by ceding reinsurers - (7,000) -
Income taxes payable/recoverable (2,242,033) 618,777 1,077,957
Deferred income taxes (68,790) (598,340) 77,202
Due to/from securities brokers 3,388,025 (3,545,389) (6,148,710)
Prepaid reinsurance premiums (590,699) (426,390) (270,393)
Other assets 212,529 (707,858) (705,913)
Reserve for losses and loss adjustment expenses (580,019) 724,781 601,443
Accounts payable 495,129 3,324,905 1,341,607
Accrued premium taxes (10,180) 388,764 103,061
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Net cash provided by (used for) operating activities 5,224,809 5,947,671 (114,544)
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Cash flows provided by (used for) investing activities:
- - ------------------------------------------------------
Proceeds from sales of available-for-sale securities 15,521,460 26,278,568 12,995,673
Purchases of available-for-sale securities (18,663,376) (26,716,842) (10,588,065)
Maturities of available-for-sale securities 1,380,745 4,053,867 2,179,652
Purchases of depreciable assets (254,654) (782,511) (599,088)
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Net cash (used for) provided by investing activities (2,015,825) 2,833,082 3,988,172
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Cash flows (used for) provided by financing activities:
- - ------------------------------------------------------
Cash dividends paid (1,753,804) (3,111,938) (1,564,641)
Stock options exercised 13,777 45,273 76,285
Net cost of purchase of treasury stock (540,926) (3,152,895) (2,343,954)
------------- -------------- -------------
Net cash used for financing activities (2,280,953) (6,219,560) (3,832,310)
------------- -------------- -------------
Net increase in cash 928,031 2,561,193 41,318
Cash, beginning of period 3,641,628 1,080,435 1,080,435
------------- -------------- -------------
Cash, end of period $ 4,569,659 $ 3,641,628 $ 1,121,753
============= ============== =============
Cash paid during the period for:
Income taxes $ 1,499,021 $ 4,856,364 $ 3,429,748
============= ============== =============
7
CAPITOL TRANSAMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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):
June 30, December 31, June 30,
2001 2000 2000
----------- ------------- -----------
Numerator:
----------
Consolidated net (loss) income ($313,582) $ 14,453,317 $ 9,072,630
=========== ============= ===========
Denominator:
------------
Basic EPS - weighted average shares of common stock 10,957,829 11,124,074 11,224,260
Effect of dilutive securities - unexercised stock options - 34,388 31,147
----------- ------------- -----------
Diluted EPS - weighted average shares of common
stock and unexercised stock options 10,957,829 11,158,462 11,255,407
=========== ============= ===========
The effect of dilutive securities was excluded from the diluted loss per
common share computation for the six months ended June 30, 2001, because
the Company had a net loss in this period and their inclusion would have
been anti-dilutive.
(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.
8
(5) Common Stock Options
----------------------
There were 2,203 options exercised during the six months ended June 30,
2001 compared to 19,196 options exercised during the six months ended
June 30, 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.
(6) Dividends
---------
2001
----
On May 30, 2001, a cash dividend of $.08 per share was declared to
shareholders of record June 8, 2001 and paid June 28, 2001 in the amount
of $875,593.
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
Consolidated Statement of Income to carrying values equal to their
estimated fair values.
Investment real estate is carried at cost, net of accumulated
depreciation of $1,845,294, $1,595,693 and $1,378,314 at June 30, 2001,
December 31, 2000 and June 30, 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
-------------------------------------------
June 30, December 31, June 30,
2001 2000 2000
------------- -------------- ------------
Total Revenues:
Property & Casualty $ 39,027,798 $ 75,198,171 $35,528,425
Fidelity & Surety 9,643,259 21,472,270 9,977,597
Reinsurance Assumed 181,225 1,008,654 402,468
------------- -------------- ------------
Subtotal $ 48,852,282 $ 97,679,095 $45,908,490
Reconciliation to Consolidated GAAP:
Capital & Surplus 1,905,380 12,036,436 4,852,785
Inter-company adjustments (74,733) (207,069) (41,833)
------------- -------------- ------------
Total Consolidated Revenues $ 50,682,929 $ 109,508,462 $50,719,442
============= ============== ============
Before-tax (Loss) Profit:
Property & Casualty ($816,455) $ 4,627,311 $ 3,900,792
Fidelity & Surety (2,478,114) (548,495) 2,513,113
Reinsurance Assumed 75,743 2,374,163 1,239,430
------------- -------------- ------------
Subtotal ($3,218,826) $ 6,452,979 $ 7,653,335
Reconciliation to Consolidated GAAP:
Capital & Surplus 1,905,380 12,036,436 4,852,785
Inter-company adjustments 188,928 828,846 435,438
------------- -------------- ------------
Consolidated Net (Loss) Income Before Tax ($1,124,518) $ 19,318,261 $12,941,558
============= ============== ============
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 81% of the business written while the fidelity-surety
segment accounts for approximately 19% 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. However, on the positive side, the industry appears to be
hardening, with rate increases slowly being implemented.
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 slightly for the sixth months ended June 30, 2001
compared to the same period in 2000 and increased by approximately $406,000 for
the three months ended June 30, 2001 compared to the same period in 2000.
Underwriting income decreased by approximately $8.8 million for the six months
ended June 30, 2001 compared to the same period in 2000 and decreased by
approximately $5.6 million for three months ended June 30, 2001 compared to the
same period in 2000. These decreases were primarily due to increases in the
Company's loss and loss adjustment expenses of $11.5 million and $7.1 million,
respectively, for the six and three month periods ended June 30, 2001. For the
six months ended June 30, 2001, net income decreased to a loss of approximately
$314,000 compared to net income of approximately $9.1 million for the same
period in 2000. For the three months ended June 30, 2001, net income decreased
to a loss of approximately $2.2 million compared to net income of approximately
$3.4 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 six and three month periods ended June 30, 2001 compared to the same
periods in 2000.
Six Months Ended Six Months Ended Three Months Ended Three Months Ended
June 30, June 30, June 30, 2001 June 30, 2000
2001 2000
------------------------ --------------------- ---------------------- ---------------------- ----------------------
Gross Premiums Written $61,883,716 $51,758,281 $34,310,461 $28,393,322
Reinsurance Ceded 7,152,124 3,862,142 3,968,484 2,445,143
------------------------ --------------------- ---------------------- ---------------------- ----------------------
Net Premiums Written $54,731,592 $47,896,139 $30,341,977 $25,948,179
======================== ===================== ====================== ====================== ======================
Net Premiums Earned $47,320,300 $42,080,648 $24,477,487 $21,414,099
======================== ===================== ====================== ====================== ======================
Net Unearned Premium
Reserve $53,589,577 $45,540,141 $53,589,577 $45,540,141
======================== ===================== ====================== ====================== ======================
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 six months ended June
30, 2001, the Company increased its gross premiums written across all of its
product lines by 20.5% compared to the same period in 2000. Approximately 8% of
this increase is attributable to rate increases with the remainder being due to
volume increases. The Company reduced its gross premiums written in the
fidelity-surety bond market by approximately 5% due almost entirely to decreases
in volume. The Company increased its gross premiums written in the
property-casualty market by approximately 27%, of which 10% of the increase in
premiums was due to rate increases with the remainder coming from volume
increases.
For the three months ended June 30, 2001, the Company increased its gross
premiums written across all of its lines by 21% compared to the same period in
2000. Approximately 10% is attributable to rate increases with the remainder
being due to volume increases. The Company reduced its gross premiums written in
the fidelity-surety bond market by approximately 4% due primarily to decreases
in volume. The Company increased its gross premiums written in the
property-casualty market by approximately 25%, of which 12% of the increase in
premiums was due to rate increases with the remainder coming from volume
increases.
For the six months ended June 30, 2001, the fidelity-surety loss and loss
adjustment expense ratio was 69.8% of net premiums earned compared to 27.1% for
the same period in 2000. For the three months ended June 30, 2001, the
fidelity-surety loss and loss adjustment expense ratio was 75.9% of net premiums
earned compared to 39.7% for the same period in 2000. These increases were due
to two factors. First, the ratios for the six and three month periods ended June
30, 2000 were 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 50% and 50%, respectively, of the fidelity-surety
losses and loss adjustment expenses for the six and three month periods ended
June 30, 2001. To prevent additional losses, the Company has stopped writing new
bonds with this contractor as well as canceling the agent responsible for the
production of this and other unprofitable business. Had the fidelity-surety
losses discussed above occurred consistent with the Company's historical claim
levels, the Company's fidelity-surety loss and loss adjustment expense ratio for
the six and three month periods ended June 30, 2001 would have been 55% and 55%,
respectively, and the overall loss and loss adjustment expense ratio would have
been 53% and 53%, respectively.
For the six months ended June 30, 2001, the property-casualty loss and loss
adjustment expense ratio was 63.0% of net premiums earned compared to 59.4% of
net premiums earned for the same period in 2000. For the three months ended June
30, 2001, the property-casualty loss and loss adjustment expense ratio was 72.4%
of net premiums earned compared to 68.0% of net premiums earned for the same
period in 2000. These increases were due to losses resulting from Midwest storms
and large fires. The storm losses increased the property-casualty loss and loss
adjustment expense ratio from 3.8% of total net premiums earned for the six
month period ended June 30, 2000 to 9.1% of total net premiums earned for the
same period in 2001. While the Company cannot control the immediate impact of
storm losses, it is looking at the trends of storm losses as well as employing
loss control efforts to try to minimize the effects of these types of losses.
The large fire losses increased the property-casualty loss and loss adjustment
expense ratio from 18.2% of total net premiums earned for the six month period
ended June 30, 2000 to 19.0% of total net premiums earned for the same period in
2001. Specifically, for the six months ended June 30, 2001, the Company has had
30 fire claims with over $150,000 in incurred losses compared to only 15 such
cases in 2000. The Company is utilizing increased loss control efforts relating
to fire losses, especially in the restaurant and tavern markets, where the
losses tend to be higher due to arson. Specifically, the Company is focusing its
efforts to review hazard reports and current client financial statements. Had
the property-casualty losses discussed above occurred consistent with the
Company's historical claim levels, the Company's property-casualty loss and loss
adjustment expense ratio for the six and three month periods ended June 30, 2001
would have been 52.5% and 52.5%, respectively, and the overall loss and loss
adjustment expense ratio would have been 53% and 53%, respectively.
12
Operating expenses remained relatively constant for the six months ended June
30, 2001 compared to the same period in 2000 increasing slightly from a ratio of
37.0% to 37.9%. The deferred acquisition costs reduced the operating expenses
2.7% of net earned premiums for the six months ended June 30, 2001 compared to a
reduction of 3.4% of net earned premiums for the six months ended June 30, 2000.
This reduction is due primarily to two factors. First, the increase in deferred
acquisition costs, which is a reduction of operating expenses, was $118,015 less
for the six months ended June 30, 2001 compared to the same period last year.
Second, the net earned premiums grew by over $5 million compared to the same
period in 2000.
The deferred acquisition costs reduced the operating expenses 4.0% of net earned
premiums for the three months ended June 30, 2001 compared to a reduction of
4.6% of net earned premiums for the three months ended June 30, 2000. This
reduction is due primarily to two factors. First, the increase in deferred
acquisition costs, which is a reduction of operating expenses, was $6,877 less
for the three months ended June 30, 2001 compared to the same period last year.
Second, the premiums grew by over $3 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 ratios applicable to the
deferred acquisition costs described above.
The Company's operating results from underwriting operations can be measured by
the GAAP combined loss, loss adjustment expense and operating expense ratios.
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 the six and three month periods ended June 30,
2001 compared to the same period in 2000 broken down into its loss and operating
expense components on a GAAP basis:
Six Months Ended Six Months Ended Three Months Ended Three Months Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
- -------------------------- ----------------------- ------------------------ ----------------------- ---------------------
Loss & Loss Adjustment 71.0% 52.4% 87.2% 66.3%
Exp.
Operating Expenses 37.9% 37.0% 38.1% 36.4%
- -------------------------- ----------------------- ------------------------ ----------------------- ---------------------
Combined Ratio 108.9% 89.4% 125.3% 102.7%
========================== ======================= ======================== ======================= =====================
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 below:
Six Months Ended Six Months Ended Three Months Ended Three Months Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
- -------------------------- ----------------------- ------------------------ ----------------------- ---------------------
Fixed Maturities (at $95,968,405 $78,629,014 $95,968,405 $78,629,014
amortized cost)
- -------------------------- ----------------------- ------------------------ ----------------------- ---------------------
Net Investment Income $ 4,843,119 $ 4,502,403 $2,389,388 $2,243,802
========================== ======================= ======================== ======================= =====================
13
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 $8.2 million and $6.2 million,
respectively, in realized losses for the six and three month periods ended June
30, 2001 for "other-than-temporary" market value adjustments for certain
securities held in its portfolio. No such adjustments were made during the first
half of 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 $6.5 million for the first six months of 2001 compared to $4.0 million for
the same time period in 2000.
The Company's income tax expense has decreased from an expense of $3.9 million
for the first six months of 2000 to a 2001 year-to-date benefit of $0.8 million
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.
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 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.
June 30, December 31, June 30,
Investments 2001 2000 2000
- --------------------------------------------------- ------------- -------------- -------------
Invested Assets $240,574,024 $ 232,367,776 $214,703,864
Net Investment Income 4,843,119 9,163,062 4,502,403
Percent of Return to Average Carrying Value 4.2% 4.0% 4.0%
Realized (Losses) Gains (1,748,074) 11,805,350 3,978,978
Change in Unrealized Gains (Losses) 5,490,224 4,239,902 (1,666,813)
- --------------------------------------------------- ------------- -------------- -------------
The net unrealized gain of $5.8 million for the first six months of 2001
consists of a $0.4 million unrealized loss on fixed maturities and a $6.2
million unrealized gain 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, as evidenced by the recent increases in the Company's unrealized gains.
For the six months ended June 30, 2001, net investment income increased from
$4.5 million to $4.8 million, or 7.6%, 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.
14
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.
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 $77.4 million at June 30, 2001, compared to $77.9
million at June 30, 2000. These reserves remain relatively constant due to the
Company having a high level of loss and loss adjustment expense payments during
the first half of 2001 compared to the first half of last year, $42.9 million
compared to $36.7 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 losses 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 (81.2%, 82.0% and 79.5% at June
30, 2001, December 31, 2000 and June 30, 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 six month periods ended June 30, 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
$58,000. Discontinued reinsurance assumed had an underwriting loss of $124,000
for the six months ended June 30, 2001, compared to underwriting income of
$810,000 for the same period in 2000. Discontinued reinsurance assumed had an
underwriting loss of $64,000 for the three months ended June 30, 2001, compared
to underwriting loss of $60,000 for the same period in 2000. For the six months
ended June 30, 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 $190,000, which is consistent
with the amounts reported 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 $66,000 and $43,000 for the six months ended
June 30, 2001 and June 30, 2000, respectively. The active reinsurance assumed
contributed underwriting income of $31,000 and $36,000 for the three months
ended June 30, 2001 and June 30, 2000, respectively.
15
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.
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.
Six Months Ended Six Months Ended Three Months Ended Three Months Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
- ----------------------- --------------------- -------------------- --------------------- --------------------
Loss & Loss 71.1% 52.6% 87.3% 66.5%
Adjustment Exp.
Underwriting Expense 34.6% 35.0% 32.9% 33.2%
- ----------------------- --------------------- -------------------- --------------------- --------------------
Combined Ratio 105.7% 87.6% 120.2% 99.7%
======================= ===================== ==================== ===================== ====================
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.
Six Months Ended Six Months Ended Three Months Ended Three Months Ended
Combined Ratio June 30, June 30, June 30, June 30,
2001 2000 2001 2000
- ----------------------- --------------------- -------------------- --------------------- --------------------
Company 105.7% 87.6% 120.2% 99.7%
Industry* 106.2% 110.2% N/A N/A
- ----------------------- --------------------- -------------------- --------------------- --------------------
*Year-to-date 2001 industry average is for the 1st quarter of 2001, the most recently available
data. Industry data is not available for the three month periods ended June 30, 2001 and 2000,
respectively. The industry data is based upon the press release published by Insurance Services
Offices, Inc. entitled "Property/Casualty Industry's Net Income and Surplus Drop in First Quarter
Despite Surging Premium Growth" dated as of June 25, 2001.
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
- - ----------------------------- June 30, December 31, June 30,
BALANCE SHEETS 2001 2000 2000
- - ------------------------------------------------------ ------------- -------------- -------------
ASSETS
Cash and Invested Assets $232,742,823 $ 220,326,616 $203,180,898
Other Assets 31,522,366 24,911,537 31,428,022
- - ------------------------------------------------------ ------------- -------------- -------------
Total Assets $264,265,189 $ 245,238,153 $234,608,920
====================================================== ============= ============== =============
LIABILITIES
Reserves for Losses and Loss Adjustment Expenses $ 80,768,518 $ 80,127,074 $ 77,492,685
Unearned Premiums 51,284,861 43,873,569 43,982,121
Other Liabilities 13,082,942 13,320,126 16,665,793
- - ------------------------------------------------------ ------------- -------------- -------------
Total Liabilities 145,136,321 137,320,769 138,140,599
- - ------------------------------------------------------ ------------- -------------- -------------
SURPLUS AS REGARDS POLICYHOLDERS
Shareholders' Equity 119,128,868 107,917,384 96,468,321
- - ------------------------------------------------------ ------------- -------------- -------------
Total Liabilities and Capital $264,265,189 $ 245,238,153 $234,608,920
====================================================== ============= ============== =============
STATEMENTS OF INCOME
Premiums Earned $ 47,320,300 $ 88,184,842 $ 42,080,648
Underwriting Deductions 52,288,300 90,802,716 39,231,150
- - ------------------------------------------------------ ------------- -------------- -------------
Net Underwriting Gain (Loss) (4,968,000) (2,617,874) 2,849,498
- - ------------------------------------------------------ ------------- -------------- -------------
Investment Income Including Sales 2,504,194 20,845,091 8,264,815
Other Income 287,492 396,399 156,818
Dividends to Policyholders 468,582 489,085 -
Income Tax Expense (979,435) 5,131,195 3,508,842
- - ------------------------------------------------------ ------------- -------------- -------------
Net Income ($1,665,461) $ 13,003,336 $ 7,762,289
====================================================== ============= ============== =============
CAPITOL SPECIALTY INSURANCE CORPORATION
- - ---------------------------------------
BALANCE SHEETS
- - --------------
ASSETS
Cash and Invested Assets $ 4,213,821 $ 4,474,294 $ 4,325,909
Other Assets 135,313 201,378 213,128
- - ------------------------------------------------------ ------------- -------------- -------------
Total Assets $ 4,349,134 $ 4,675,672 $ 4,539,037
====================================================== ============= ============== =============
LIABILITIES
Liabilities Other Than For Insurance Obligations 7,709 7,709 7,713
- - ------------------------------------------------------ ------------- -------------- -------------
Total Liabilities 7,709 7,709 7,713
- - ------------------------------------------------------ ------------- -------------- -------------
SURPLUS AS REGARDS POLICYHOLDERS
Shareholders' Equity 4,341,425 4,667,963 4,531,324
- - ------------------------------------------------------ ------------- -------------- -------------
Total Liabilities and Capital $ 4,349,134 $ 4,675,672 $ 4,539,037
====================================================== ============= ============== =============
STATEMENTS OF INCOME
Underwriting Deductions 3,375 6,278 3,645
- - ------------------------------------------------------ ------------- -------------- -------------
Net Underwriting Gain (3,375) (6,278) (3,645)
- - ------------------------------------------------------ ------------- -------------- -------------
Investment Income Including Sales 102,213 249,300 130,373
Income Tax Expense 7,761 10,634 12,541
- - ------------------------------------------------------ ------------- -------------- -------------
Net Income $ 91,077 $ 232,388 $ 114,187
====================================================== ============= ============== =============
17
SIGNATURES
----------
Pursuant to the requirements of Sections 13 or 15(d) of 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