The Company also leases approximately 2,900 square feet of storage space from the President of the Company in a personally owned warehouse at terms as favorable as those available from unaffiliated third parties.
The Company also leases 1,190 square feet of office space in Las Vegas, Nevada. The term of the lease is from February 1, 1998 to January 31, 2001.
The underwriting cycles of the property-casualty insurance industry have been characterized by peak periods of adequate rates, underwriting profits and lower combined ratios, while the downward side of the cycle is characterized by in- adequate rates, underwriting losses and, as a result, higher combined ratios. The adequacy of premium rates is affected primarily by the severity and frequen- cy 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 indus- try, the trend of increasing price competition has continued as has the number of significant natural disasters. This combination has resulted in a consider- able reduction in underwriting profitability for the industry as a whole.
Adequate premium rates continue to be of concern to the Company and the pro- perty-casualty insurance industry as a whole. Mangement 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 mange- ment. The Company has responded to this challenge with increased marketing ef- forts 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, managment belives that the property-casualty in- surance industry is in a downward cycle. However, despite a decrease in premium writings, the Company saw a substantial increase in the profitability of its core operations in 1999. Underwriting income increased to $6.3 million this year compared to $5.6 million in 1998 and a loss of $2.3 million in 1997. The de- crease in premiums written experienced over the past two years was due to a re- underwriting of the Company's entire book of business. Management is confident that the increased emphasis on prudent underwriting standards as well as aggres- sive marketing will assure a continuation of the Company's history of substan- tial underwriting profits and increasing shareholder value.
Gross premiums written during 1999 were $86,002,801, compared with $87,929,152 in 1998 and $99,507,846 in 1997.
The Company's fixed maturities and equity securities are classified as avail- able-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.
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 in- come taxes arise from timing differences between the recognition of income de- termined 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.
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 $77,256,192 as of December 31, 1999 compared to $78,504,050 as of December 31, 1998. This decrease is a combination of giving consideration for the decrease in premium volume as well as the more favorable loss development trend experienced in 1999. Management continues to closely monitor the reserves for losses and loss adjustment expenses to assure adequate recognition of the ultimate liability for claims and claim expenses.
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 occur on Janury 1, 2000 and remain in effect for the life of the fixed income portfolio.
The Company expensed approximately $90,000 during 1999 in connection with re- mediating its systems. The Company is not aware of any material problems result- ing 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.
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, con- stitute "forward-looking statements" within the meaning of the Private Securi- ties Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, estimates subject to change in circumstances, uncer- tainties 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 of the Company expressed or implied by the forward- looking statements.
(1) Capitol Transamerica Corporation Consolidated Financial Statements. (2) Report of independent auditors. (3) Consolidated balance sheets - December 31, 1999 and 1998. (4) Consolidated statements of income - for each of the three years in the period ended December 31, 1999. (5) Consolidated statements of shareholders' in- vestment and comprehensive income (loss) - for each of the three years in the period ended December 31, 1999. (6) Consolidated statements of cash flows - for each of the three years in the period ended December 31, 1999. (7) Notes to consolidated financial statements.