- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period ended: March 31, 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 (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
- --------------------------------------------------------------------------------
(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
------------------- -------------------
Based on the closing average of the high (13 1/2) and low price (13 1/8), the
aggregate market value of voting stock held by non-affiliates of the registrant
as of March 31, 2001 was approximately $145,764,180.
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
Total Pages: 22
Securities and Exchange Commission
----------------------------------
Washington, D.C.
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Form 10-Q
---------
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 - 13
Condensed Statutory Financial
Statements of Insurance Subsidiaries 14
Part II
-------
Other Information
- ------------------
Other Disclosures 15
Officers and Directors 16
Signatures 17
Exhibit Index 18
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
------------ ------------- ------------
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
------------- -------------- -------------
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
------------- -------------- -------------
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
------------ ------------
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
------------ ------------
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
------------ ------------
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
============ ============
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) discontinued reinsurance assumed
operations. These segments constitute 100% of the operations of the
Company. Data for each segment as required for interim reporting follows:
Year-to-date
-------------------------------------------
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
Discontinued 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
Discontinued 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
- ------------------
As mentioned in the Overview, management believes that the property-casualty
industry is in a downward cycle. However, due to a combination of increased
marketing efforts and the re-underwriting of the Company's book of business
undertaken in 1998 and 1999, the Company's operating results remain quite
favorable. Operating income decreased compared to 2000 due primarily to higher
than expected losses on a few specific surety contract bonds coupled with better
than normal results for the first quarter of 2000, a 75.4% trade combined ratio.
Had the losses on the aforementioned bonds not occurred, the combined ratio
would have been approximately 87.5%, a level typical of the Company's history.
Management is confident that the return to solid underwriting standards and
continued profitability of the Company's core operations will provide a
foundation for increasing shareholder value.
Gross premiums written increased 18% over the first quarter of 2000, going from
$23.4 million to $27.6 million. The increase is due to rate increases and the
Company's concerted efforts to profitably grow its business. Management
continually monitors the Company's expansion efforts to ensure that the Company
is growing profitably. Net premiums written followed gross premiums written,
increasing from $21.9 million to $24.4 million, or 11.1%.
Premiums earned are recognized as net revenues after a reduction for reinsurance
ceded and after the establishment of the provision for a pro-rata unearned
portion of the premiums written. Premiums earned totaled $22.8 million for the
first three months of 2001, compared to $88.2 million for calendar year 2000 and
$20.7 million for the first three months of 2000. The unearned premium reserve
at the end of these same three periods was $47.3 million, $45.6 million and
$40.8 million, respectively.
March 31, December 31, March 31,
2001 2000 2000
----------- ------------- -----------
Gross Premiums Written $27,573,255 $ 102,110,215 $23,364,959
Reinsurance Ceded 3,183,640 8,218,433 1,416,999
----------- ------------- -----------
Net Premiums Written $24,389,615 $ 93,891,782 $21,947,960
=========== ============= ===========
Net Premiums Earned $22,842,813 $ 88,184,842 $20,666,549
=========== ============= ===========
Net Unearned Premium Reserve $47,321,210 $ 45,587,586 $40,802,756
=========== ============= ===========
11
The Company's underwriting results can be measured by reference to the combined
loss and expense ratios. The following table includes the operating results of
the Company's two subsidiary insurance companies on a statutory basis. Losses
and loss adjustment expenses are stated as a percentage of net premiums earned,
while underwriting expenses are stated as a percentage of net premiums written.
The combined ratios are as follows:
March 31, December 31, March 31,
Insurance Operating Ratios (Statutory Basis) 2001 2000 2000
- -------------------------------------------- ---------- ------------- ----------
Losses and Loss Adjustment Expenses 53.8% 65.4% 38.1%
Underwriting Expenses 36.7% 35.1% 37.3%
- -------------------------------------------- ---------- ------------- ----------
Combined Ratio 90.5% 100.5% 75.4%
============================================ ========== ============= ==========
The Company's combined ratio consistently compares very favorably to the
industry average, as indicated by the following chart:
Year-to-date Year-end Year-end
Combined Ratio 2001 2000 1999
- -------------------- ------------- --------- ---------
Company 90.5% 100.5% 75.4%
Industry Average N/A 110.4% 110.2%
- -------------------- ------------- --------- ---------
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.
First quarter, 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.
12
Under FASB Statement 115, the Company absorbed $2.0 million in realized losses
in the first quarter for "other-than- temporary" market value adjustments for
certain securities held in its portfolio. Additionally, management continues to
monitor its investment portfolio for other securities that could potentially
fall into this category in the future.
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 $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.
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.
13
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
====================================================== ============= ============== =============
14
PART II
-------
OTHER DISCLOSURES
-----------------
Item 1. Legal Proceedings
Reference is made to footnote number 8 "Contingent
Liabilities" on Page 9 of this report.
Item 2. Changes in Securities and Use of Proceeds
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
Reference is made to the Notice of Annual Meeting of
Shareholders and Proxy Statement for the Annual Meeting of
Shareholders to be held on May 14, 2001, both of which are
dated April 6, 2001 and previously filed with the Securities
and Exchange Commission and are incorporated herein as an
exhibit by reference.
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
NONE
15
CAPITOL TRANSAMERICA CORPORATION
Subsidiaries
------------
Capitol Indemnity Corporation
Capitol Specialty Insurance Corporation
Capitol Facilities Corporation
Board of Directors
------------------
Paul J. Breitnauer Michael J. Larson
Vice President and Treasurer Principal
Capitol Transamerica Corporation Southwestern Financial Services
Madison, Wisconsin Madison, Wisconsin
Larry Burcalow Reinhart H. Postweiler
Owner and President Retired, formerly with
Yahara Materials, Inc. Flad Affiliated Corporation
Waunakee, Wisconsin Madison, Wisconsin
George A. Fait Kenneth P. Urso
Chairman of the Board and President Principal
Capitol Transamerica Corporation Urso Ventures
Madison, Wisconsin Madison, Wisconsin
Officers
--------
George A. Fait Virgiline M. Schulte
Chairman of the Board and President Secretary
Paul J. Breitnauer Jane F. Endres
Vice President and Treasurer Assistant Secretary
16
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPITOL TRANSAMERICA CORPORATION
---------------------------------------------
George A. Fait
Chairman of the Board and President
---------------------------------------------
Paul J. Breitnauer
Vice President and Treasurer
Date: May 10, 2001
17
Exhibit Index
Exhibit Number Exhibit Description
- --------------- -------------------------------------------------
99 Press Release -- Capitol Transamerica Corporation
Reports First Quarter (March 31, 2001) Results
18