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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period ended: June 30, 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
--------------
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
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Based on the closing average of the high (15.86) and low price (14.91), the
aggregate market value of voting stock held by non-affiliates of the registrant
as of June 30, 2001 was approximately $168,471,950.
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
Total Pages: 38
Securities and Exchange Commission
----------------------------------
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 11-13
Condensed Statutory Financial Statements of
Insurance Subsidiaries 14
Part II
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Other Information
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Other Disclosures 15
Officers and Directors 16
Signatures 17
Exhibit Index 18
2
CAPITOL TRANSAMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31, June 30,
2001 2000 2000
------------ ------------- ------------
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
------------ ------------- ------------
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
------------- -------------- -------------
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 - -
------------- -------------- -------------
Total Other Liabilities 16,956,149 13,989,624 9,824,871
------------- -------------- -------------
Total Liabilities 147,946,680 137,558,183 133,222,647
------------- -------------- -------------
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
------------- -------------- -------------
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)
------------- -------------- -------------
Total Shareholders' Investment 148,595,558 145,699,869 136,799,717
------------- -------------- -------------
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
$1.00) Surplus Income (Loss) Income (Loss)
------------ ------------ -------------- ---------------
Balance, January 1, 1999 $11,529,376 $ 22,246,366 - $ 18,019,545
Comprehensive income (loss):
Net income - - 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 - -
Purchases and sales of treasury stock, net - 290,424 - -
Cash dividends paid - - - -
------------ ------------ -------------- ---------------
Balance, December 31, 1999 $11,538,970 $ 22,594,538 - ($3,962,398)
Comprehensive income:
Net income - - 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 - -
Stock-based compensation - - - -
Purchases and sales of treasury stock, net - - - -
Cash dividends paid - - - -
------------ ------------ -------------- ---------------
Balance, December 31, 2000 $11,558,767 $ 22,733,088 - $ 277,504
Comprehensive (loss) income:
Net loss - - (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 - - - -
Purchases and sales of treasury stock, net - - - -
Cash dividends paid - - - -
------------ ------------ -------------- ---------------
Balance, June 30, 2001 $11,560,970 $ 22,744,662 - $ 5,767,728
============ ============ ============== ===============
Retained Treasury
Earnings Stock
------------- ------------
Balance, January 1, 1999 $ 90,016,245 ($495,559)
Comprehensive income (loss):
Net income 16,712,463 -
Other comprehensive loss:
Unrealized depreciation on available-for-sale
securities, net of deferred taxes - -
Less: reclassification adjustment, net of tax of
$2,864,435, for gain included in net income - -
Other comprehensive loss - -
Comprehensive loss - -
Stock options exercised - (26,534)
Purchases and sales of treasury stock, net - -
Cash dividends paid (3,151,515) -
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Balance, December 31, 1999 $103,577,193 ($522,093)
Comprehensive income:
Net income 14,453,317 -
Other comprehensive income:
Unrealized appreciation on available-for-sale
securities, net of deferred taxes - -
Less: reclassification adjustment, net of tax of
$2,546,352, for gain included in net income - -
Other comprehensive income - -
Comprehensive income - -
Stock options exercised - (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 $114,944,048 ($3,813,538)
Comprehensive (loss) income:
Net loss (313,582) -
Other comprehensive income:
Unrealized appreciation on available-for-sale
securities, net of deferred taxes - -
Less: reclassification adjustment, net of tax of
$611,826, for gain included in net income - -
Other comprehensive income - -
Comprehensive income - -
Stock options exercised - -
Stock-based compensation 207,224 -
Purchases and sales of treasury stock, net - (748,150)
Cash dividends paid (1,753,804) -
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Balance, June 30, 2001 $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
------------- -------------- -------------
Net cash provided by (used for) operating activities 5,224,809 5,947,671 (114,544)
------------- -------------- -------------
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)
------------- -------------- -------------
Net cash (used for) provided by investing activities (2,015,825) 2,833,082 3,988,172
------------- -------------- -------------
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.
(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.
8
(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) 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
-------------------------------------------
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
Discontinued 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
Discontinued 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
- ------------------
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 favorable. Operating income decreased compared to 2000
due primarily to higher than expected losses on a few specific surety contract
bonds coupled with higher than normal storm losses. Had the aforementioned
losses not occurred, the combined ratio would have been approximately 88.7%, a
level typical of the Company's history. Management believes 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 20% over the first half of 2000, going from
$51.8 million to $61.9 million. The increase is due to the rate increases
mentioned in the Overview along with 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 $47.9 million to $54.7
million, or 14.3%.
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 $47.3 million for the
first six months of 2001, compared to $88.2 million for calendar year 2000 and
$42.1 million for the first six months of 2000. The unearned premium reserve at
the end of these same three periods was $53.6 million, $45.6 million and $45.5
million, respectively.
June 30, December 31, June 30,
2001 2000 2000
----------- ------------- -----------
Gross Premiums Written $61,883,716 $ 102,110,215 $51,758,281
Reinsurance Ceded 7,152,124 8,218,433 3,862,142
----------- ------------- -----------
Net Premiums Written $54,731,592 $ 93,891,782 $47,896,139
=========== ============= ===========
Net Premiums Earned $47,320,300 $ 88,184,842 $42,080,648
=========== ============= ===========
Net Unearned Premium Reserve $53,589,577 $ 45,587,586 $45,540,141
=========== ============= ===========
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:
June 30, December 31, June 30,
Insurance Operating Ratios (Statutory Basis) 2001 2000 2000
- -------------------------------------------- --------- ------------- ---------
Losses and Loss Adjustment Expenses 71.1% 65.4% 52.6%
Underwriting Expenses 34.6% 35.1% 35.0%
- -------------------------------------------- --------- ------------- ---------
Combined Ratio 105.7% 100.5% 87.6%
============================================ ========= ============= =========
The Company's combined ratio consistently compares favorably to the industry
average, as indicated by the following
chart:
Year-to-date Year-end Year-end
Combined Ratio 2001 2000 1999
- ---------------------- ------------- --------- ---------
Company 105.7% 100.5% 87.6%
Industry Average * 106.2% 110.4% 110.2%
- ---------------------- ------------- --------- ---------
* Year-to-date 2001 industry average is for the 1st quarter, 2001, the most
recently available data.
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.
First half, 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.
12
Under FASB Statement 115, the Company absorbed $8.2 million in realized losses
in the six months 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.
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.
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
- ----------------------------- 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
====================================================== ============= ============== =============
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
During the quarter ended June 30, 2001, the Company issued an
aggregate of approximately 181 shares of its common stock at an
aggregate exercise price of approximately $9.69 in connection with the
exercise of options issued pursuant to the Company's stock option
plan. The shares of common stock were issued pursuant to exemptions
from registration under Section 4(2) of the Securities Act of 1933, as
amended.
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 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.
At this meeting, Larry Burcalow and Michael J. Larson were nominated
and re-elected to terms expiring in 2004. George A. Fait, Kenneth P.
Urso, Paul J. Breitnauer and Reinhart H. Postweiler continue as
directors through the expiration of their terms. Additionally, Ernst &
Young LLP was ratified as the Company's independent auditors for 2001.
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
3.2 - By-Laws of Capitol Transamerica Corporation as Amended
99.1 - Press Release - Capitol Transamerica Corporation
Reports Second Quarter (June 30, 2001) Results
(b) Reports on Form 8-K
-------------------
Reference is made to the Agreement and Plan of Merger with
Alleghany Corporation, which was previously filed with the
Securities and Exchange Commission on Form 8-K on July 23, 2001
and is incorporated herein by reference.
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
/s/ George A. Fait
- ---------------------------------------------
George A. Fait
Chairman of the Board and President
/s/ Paul J. Breitnauer
- ---------------------------------------------
Paul J. Breitnauer
Vice President and Treasurer
Date: August 10, 2001
17
Exhibit Index
-------------
Exhibit Number Exhibit Description
- -------------- -------------------
3.2 By-Laws of Capitol Transamerica Corporation as
Amended
99.1 Press Release - Capitol Transamerica Corporation
Reports Second Quarter (June 30, 2001) Results
18