Approximately 38,098 square feet occupying a portion of the 1st, 2nd, 6th, 9th and 10th floors and all of the 11th, 12th, 13th and 14th floors. The term of the lease is from June 1, 1996 through May 31, 1999.
The Company also leases 1,190 square feet of office space in Las Vegas, Nevada. The term of the lease is from November 1, 1996 to October 31, 1999.
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 75% of the business written while the fidelity-surety segement accounts for approximately 25% 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 compe- tition in the Company's niche market, has presented an unprecedented challenge to management. The Company has responded to this challenge with increased mar- keting 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, the property-casualty insurance industry is in a downward cycle. However, despite a decrease in premium writings, the Company had a profitable year in 1998. The increased claim activity that the Company experienced in 1997 has stabilized, as indicated by the decrease in the com- bined ratio. The marketing strategy of expansion into new states and the addition of compatible coverages continues to be the focus as the Company approaches the new millenium.
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 1998 totaled $88,629,476, compared with $87,451,620 and $77,347,319 in 1997 and 1996, respectively. The net un- earned premium reserve was $41,541,432, $47,411,849 and $43,258,833 at each yearend.
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 as of 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 ad- justment expenses were $78,504,050 at December 31, 1998 compared with $71,472,338 at December 31, 1997. This increase is a combination of giving con- sideration for increases in premium volume, increased retention on all lines of coverages written and an increase in the IBNR reserves. Management continues to closely monitor the reserve development trends and projections as it attempts to stabilize the loss reserve development which has occurred in recent years.
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 (85.9% in 1998, 85.7% in 1997 and 80.7% in 1996) 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 Com- pany 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 course of ordinary business involvement and activities. The Company has no material capital expenditure commitments.
Market risk is defined by the Securities Exchange Commission as exposure to ad- verse fluctuations in interest 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 re- quirements. However, the requirements are broad enough in scope to encompass the potential impact of interest rate fluctuations on the Company's fixed in- come portfolio, as well as the potential impact of a severe drop in the stock market on the Company's common stock portfolio.
The following table shows the interest rate sensitivity of the Company's fixed income investments (bonds and preferred stock) by presenting the projected im- pact of a parallel rise or decline in interest rates of 100 and 200 basis points. The interest rate fluctuation is assumed to have occurred on January 1, 1999 and remain in effect for the life of the fixed income portfolio.
(4) Consolidated statements of income - for each of the three years in the period ended December 31, 1998.
(5) Consolidated statements of shareholders' investment and compre- hensive income- for each of the three years in the period ended December 31, 1998.
(6) Consolidated statements of cash flows - for each of the three years in the period ended December 31, 1998.