Capitol Transamerica Corporation (the "Company") is an insurance holding company operating in 37 states which writes, through its subsidiaries, both property-casualty and fidelity-surety insurance. The property-casualty segment accounts for approximately 77% of the business written while the fidelity-surety segment accounts for approximately 23% of the Company's business.
Adequate premium rates continue to be of concern to the Company and the property-casualty insurance industry as a whole. Management feels strongly that rate regulators have been slow to adjust rates in response to increased claim costs from the factors noted above. This, when combined with increased competition in the Companys' niche market, has presented an unprecedented challenge to management. The Company has responded to this challenge with increased marketing efforts as well as the addition of innovative programs and alliances that should position the Company for continued expansion and profitability.
As mentioned in the Overview, management believes that the property-casualty insurance industry is in a downward cycle. Underwriting income decreased to a loss of $2,005,359 this year compared to income of $6,340,680 in 1999 and income of $5,569,908 in 1998. The 2000 decrease in underwriting income is due to larger than expected losses on a few specific claims as well as a $7,000,000 reserve strengthening for the increased premium volume. Had these items not occurred, underwriting income would have been approximately $13,000,000. Management is confident that the increased emphasis on prudent underwriting standards as well as aggressive marketing will assure a continuation of the Company's history of substantial underwriting profits and increasing shareholder value.
Premiums earned are recognized as net revenues after reduction for reinsurance ceded and after establishment of the provision for the pro rata unearned portion of premiums written. Net premiums earned in 2000 totaled $88,184,842 compared with $82,841,104 and $88,629,476 in 1999 and 1998, respectively. The net unearned premium reserve was $45,587,586, $39,454,257, and $41,541,432 at each year end.
2000 1999 1998 --------------------------------------------------------------------------- Gross Premiums Written $ 102,110,215 $ 86,002,801 $ 87,929,152 Reinsurance Ceded 8,218,433 5,809,425 5,153,179 --------------------------------------------------------------------------- Net Premiums Written $ 93,891,782 $ 80,193,376 $ 82,775,973 =========================================================================== Net Premiums Earned $ 88,184,842 $ 82,841,104 $ 88,629,476 =========================================================================== Net Unearned Premium Reserve $ 45,587,586 $ 39,454,257 $ 41,541,432 ===========================================================================
During the year, the Company continued the program of purchasing treasury stock for contingent commission payments. Under this program, the Company distributes shares of stock as additional compensation to agents based on achievement of premium growth and loss ratio targets for the agent's business in the prior year.
Interest and Dividend Income: Interest on fixed maturities is recorded as income when earned and is adjusted for any amortization of purchase premium or accretion of discount. Dividends on equity securities are recorded as income on ex-dividend dates.
Investments: 2000 1999 1998 - -------------------------------------------------------------------------------- Invested Assets 232,367,776 $218,085,184 $238,140,592 Net Investment Income 9,163,062 9,136,244 9,119,936 Percent of Return to Average Carrying Value 4.0% 4.2% 4.5% Realized Gains 11,805,350 8,184,101 13,198,139 Change in Unrealized Gains 4,239,902 $(21,981,943) $(14,657,027) - --------------------------------------------------------------------------------
Net investment income in 2000 amounted to $9,163,062 compared with $9,136,244 and $9,119,936 in 1999 and 1998, respectively. The Company holds a large percentage of equity investments, which results in a comparatively lower rate of return on invested assets.
Income tax expense is based on income reported for financial statement purposes and tax laws and rates in effect for the years presented. Deferred federal income taxes arise from timing differences between the recognition of income determined for financial reporting purposes and income tax purposes. Such timing differences are related principally to the deferral of policy acquisition costs, the recognition of unearned premiums and discounting of claims reserves for tax purposes. Deferred taxes are also provided on unrealized gains and losses.
Liquidity refers to the Company's ability to meet obligations as they become due. The obligations and cash outflow of the Company include claim settlements, acquisition and administrative expenses, investment purchases and dividends to shareholders. In addition to satisfying obligations and cash outflow through premium collections, there is cash inflow obtained from interest and dividend income, maturities and sales of investments. Because cash inflow from premiums is received in advance of cash outflow required to settle claims, the Company accumulates funds which it invests pending liquidity requirements. Therefore, investments represent the majority (82.0% in 2000, 84.7% in 1999 and 85.9% in 1998) of the Company's assets. Cash outflow can be unpredictable for two reasons: first, a large portion of liabilities representing loss reserves have uncertainty regarding settlement dates; and second, there is potential for losses occurring either individually or in the aggregate. As a result, the Company maintains adequate short-term investment programs necessary to ensure the availability of funds. The investment program is structured so that a forced sale liquidation of fixed maturities should not be necessary during the ordinary course of business. The Company has no material capital expenditure commitments.
Market risk is defined as exposure to adverse fluctuations in interest rates, foreign currency exchange rates, and commodity or other price changes. The Company does not invest in derivatives or similar financial instruments, which are highly sensitive to market risk and which are the main focus of the new requirements. However, the requirements are broad enough in scope to encompass the potential impact of interest rate fluctuations on the Company's fixed income portfolio, as well as the potential impact of a severe drop in the stock market on the Company's equity investments.
The following table shows the interest rate sensitivity of the Company's fixed income investments (bonds and preferred stock) by presenting the projected impact of a parallel rise or decline in interest rates of 100 and 200 basis points. The interest rate fluctuation is assumed to occur on January 1, 2001 and remain in effect for the life of the fixed income portfolio.
The valuation of the Company's common stock portfolio is subject to equity price risk. If market prices were to decrease 10%, the fair value of the common stock portfolio would decrease by an estimated $9.0 million, from $119.4 million to $110.4 million.
The Company expensed approximately $90,000 during 1999 in connection with remediating its systems. The Company is not aware of any material problems resulting from year 2000 issues, either with our products, our internal systems or the products and services of third parties. The Company will continue to monitor its mission critical computer applications and those of its agents and vendors throughout the year 2000 to ensure that any latent year 2000 matters that may arise are addressed promptly.
SAFE HARBOR STATEMENT Some of the statements in this report, as well as statements by the Company in periodic press releases and oral statements made by the Company's officials to analysts and shareholders in the course of presentations about the Company, constitute "forward-looking statements" within the meaning fo the Private Securities Litigations Reform act of 1995. Such forward-looking statements involve known and unknown risks, estimates subject to change in circumstances, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
Financial Statements The financial statements filed by CTC in --------------------- connection with this annual report are consolidated financial statements which present all of the operations of the parent company and its subsidiaries.
(1) Capitol Transamerica Corporation Consolidated Financial Statements. (2) Report of independent auditors. (3) Consolidated balance sheets- December 31, 2000 and 1999. (4) Consolidated statements of income- for each of the three years in the period ended December 31, 2000. (5) Consolidated statements of shareholders' investment and comprehensive income (loss)- for each of the three years in the period ended December 31, 2000. (6) Consolidated statements of cash flows- for each of the three years in the period ended December 31, 2000. (7) Notes to consolidated financial statements.