Item 1. Business
(a) General Development of Business Capitol Transamerica Corporation (CTC) is a holding company with assets exceeding $286 million. CTC was formed in 1965 and owns 100% of Capitol Indemnity Corporation (CIC), Capitol Specialty Insurance Corporation (CSIC) and Capitol Facilities Corporation (CFC). Both CIC and CSIC are property and casualty insurance companies. The companies write a complete port- folio of fidelity and surety bonds and specialty insurance coverages. CIC operates on an admitted basis in thirty-five states and on an excess/sur- plus lines basis in one state. CFC provides premium financing for the insurance companies.
Some of the specialty property and casualty coverages written are: Barber & Beauty Shops, Bowling Alleys, Contractors/Manufacturers, Day Care Centers, Deer Hunters Accident, Detective/Guard Agencies, Equipment Breakdown, Golf Courses, Nurses Professional, Resorts/Campgrounds, Restaurants, Special Events, Clubs, Sportsman's Accident, Tanning/Toning Salons and Taverns.
The full line of surety and fidelity bonds includes: Contractor's Perfor- mance and Payment Bonds, License/Permit Bonds, Fiduciary Bonds, Judicial Bonds and Commercial Fidelity Bonds.
The results of operations have remained most favorable since 1986 with sub- stantial increases in premium volume, profitability and shareholders' investment.
(b) Information about Industry Segments
General: The subsidiaries of the Company, through licensed agents, are involved only in the business of underwriting property, casualty, fidelity and surety in- surance on selected risks. The Company conducts business with insurance agents located throughout the United States. As of December 31, 1997 and 1996, no amount due from agents located in any one state exceeded 15% of total balances; no industry segment other than insurance amounted to 10% or more of the Company's gross or net income and no agent had writings in ex- cess of 10% of the Company's gross premiums in 1997, 1996 or 1995. During 1997, 1996 and 1995, direct premiums written in Wisconsin accounted for approximately 17%, 18% and 21%, respectively, of the total direct premiums written by the Company.
(c) Narrative Description of Business
Competitive Conditions: All business written by the Company is highly competitive in the areas of price, service and agent relationships. The large number of insurers transacting business at rates which are independently regulated by their respective insurance departments compete aggressively for desireable busi- ness. Because of limitations in capacity and other regulatory restrictions, companies the size of CIC are sometimes at a disadvantage when competing with larger insurance companies.
CIC is required by the Insurance Commissioner of the State of Wisconsin to maintain a minimum compulsory surplus (surplus as regards policyholders) of 25% of net premiums written during the preceding twelve months. As of December 31, 1997, CIC reported $109.3 million surplus as regards policy- holders, approximately $86.5 million in excess of the required amount. In addition, CIC is required to report a minimum 60% loss and loss expense ratio for the most current three years on certain liability lines as well as a minimum 65% ratio on the workers compensation line. Based upon actual historical experience the ratios are substantially less than the require- ment and had the company not included the excess statutory reserves over statement reserves in reporting to regulatory authorities, surplus would have been $119.6 million at December 31, 1997.
Importance and Effect of Licenses: Generally speaking, insurance companies must be licensed in the states in which the insurance is written. Forms and rates for each policy offered are filed with individual state insurance departments.
Number of Persons Employed: Capitol Transamerica Corporation and subsidiaries employ 176 people.
Information as to Similar Products or Services: Gross premiums written, reinsurance ceded and net premiums written for the past five years are as follows:
(d) Copies of "Schedule P" of the Annual Statements filed with State Regulatory Authorities by CIC and CSIC are incorporated herein by reference and are available upon request.
(e) Discussion Topics
The following discussion topics, if applicable, have been included in Management's Discussion and Analysis of Financial Condition and Results of Operations and/or the Notes to Consolidated Financial Statements and the accompanying Schedules which appear elsewhere in this Annual Report:
(1) Reinsurance transactions which have a material effect on earn- ings or reserves.
(2) Significant reserving assumptions including any recent changes.
(3) The nature of recent changes in the terms under which reinsur- ance is ceded to other insurers.
(4) Changes in the mix of business, including but not limited to changes in the location of business, geographic mix and types of risks assumed.
(5) Changes in payment patterns due to portfolio loss transfers, structured settlements and other transactions or circumstances.
(6) Unusually large losses or gains.
(f) Reconciliation of Loss and Loss Adjustment Expense Reserves:
(h) Reconciliation of Statutory to Generally Accepted Accounting Principles (GAAP) reserves:
Item 2.
Item 2. Properties
Capitol Transamerica Corporation leases premises in the Pyare Square building located at 4610 University Avenue, Madison, Wisconsin, 53705, as follows:
Approximately 35,518 square feet occupying a portion of the 1st, 2nd, 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 approximately 2,000 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 200 square feet of office space in Las Vegas, Nevada. the term of the lease is from November 1, 1996 to October 31, 1999.
Item 3.
Item 3. Legal Proceedings
Capitol Indemnity Corporation (CIC) is a defendant in certain lawsuits involving complaints which demand damages and recoveries for claims and losses allegedly related to risks insured by CIC. In the opinion of management, such lawsuits are routine in that they result from the ordi- nary course of business in the insurance industry. The reserves for losses and loss adjustment expenses include management's estimates of the probable ultimate cost of settling all claims involving lawsuits. Such estimates are continually reviewed and updated. The reserves for losses and loss adjustment expenses at December 31, 1997, are, in the opinion of management, adequate to absorb claims arising from those routine legal proceedings presently in process against the Company.
Item 4.
Item 4. Submission of Matters to a Vote of Shareholders
No matters were submitted to a vote of shareholders during the Company's fourth fiscal quarter ended December 31, 1997.
Item 5.
Item 5. Market Information, Dividends and Other Information
On March 6, 1998, the approximate number of registered shareholders was 2,500. CTC is publicly owned and traded on the National Over-the-Counter Market, symbol CATA. The market price of the stock during 1997 was a low of 19 1/4 and a high of 28 1/8 with the equivalent of 1,768,556 shares traded.
Quarterly high and low quoted prices are obtained from the National Association of Securities Dealers are illustrated below. The 1996 quotations are adjusted for the December 31, 1996 3 for 2 stock split effected as a 50% dividend.
Subsidiaries S.E.C. Form 10-K
Capitol Indemnity Corporation Copies of the Company's Annual Capitol Specialty Insurance Corporation report filed with the SEC, in- Capitol Facilities Corporation cluding exhibits, are available by written request addressed to: Independent Public Accountants Paul J. Breitnauer Ernst & Young LLP Vice President & Treasurer 111 East Kilbourn Avenue 4610 University Ave. Milwaukee, Wisconsin 53202 Madison, Wisconsin 53705-0900
Transfer Agent and Registrar Annual Meeting
Firstar Trust Co. The Company's Annual Meeting Corporate Trust Services will be held Monday, May 11, 615 East Michigan Street 1998, 4:00 PM at the P.O. Box 2077 Marriot Inn - Madison West Milwaukee, Wisconsin 53201 1313 John Q. Hammond Drive Middleton, Wisconsin 53562 Common Stock
Listed: OTC Quoted: NASD (CATA)
Item 6.
Item 6. FIVE YEAR CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA:
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
Capitol Transamerica Corporation (the "Company") is an insurance holding company operating in 36 states which writes, through its subsidiaries, both property- casualty and fidelity-surety insurance. The property-casualty segment accounts for approximately 70% of the business written while the fidelity-surety segement accounts for approximately 30% of the Company's 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, 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.
Inflation also has a significant impact on the insurance industry in general, as well as on the Company. Inflation creates higher claim costs, which are then matched currently against premiums whose rating statistics were developed from data of previous years. In recent inflationary periods, this has led to inade- quate rate structures, since rate regulators are slow to grant rate adjustments at times when the overall economy is in an inflationary cycle. Studies have shown that premium rates trail the claim experience by a period of two years or more. Adequate premium rates continue to be of concern to the Company and the property-casualty insurance industry.
OPERATING RESULTS
As mentioned in the Overview, the property-casualty insurance industry is in a downward cycle. However, despite a difficult year in which the Company aggessively strengthened its reserves, mangement expects that trend of in- creasing revenues and significant underwriting gains will continue in the future. The expansion of coverages and entry into new geographic regions has contributed to increased revenues, which when combined with prudent under- writing standards should enable the Company to resume its upward trend in profitability for our shareholders. Indeed, when the industry's cycle re- verses, the Company will be in an excellent position to take advantage of premium rate increases.
Gross premiums written during 1997 were $99,507,846, compared with $90,939,387 in 1996 and $70,878,492 in 1995.
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 1997 totaled $87,451,620, compared with $77,347,319 and $63,865,500 in 1996 and 1995, respectively. The net unearn- ed premium reserve was $47,411,849, $43,258,833 and $31,555,728 at each year- end.
REINSURANCE
The Company follows the customary practice of reinsuring with other companies, e.g., ceding a portion of its exposure on the policies it has written. This pro- gram 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 serious occurrences in which a number of claims could produce a large aggregate loss. Management continually monitors the Company's reinsurance program to obtain pro- tection 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 a separate component of shareholders' investment.
Interest and Dividend Income: Interest on fixed maturities is recorded as in- come when earned and is adjusted for any amortization of purchase premium or discount. Dividends on equity securities are recorded as income on ex-dividend dates.
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 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 the claims reserves for tax purposes. Deferred taxes are also provided on unrealized gains and losses.
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 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 $71,472,338 at December 31, 1997 compared with $47,702,363 at December 31, 1996. This increase is a combination of giving con- sideration for the increase 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 AND CAPITAL RESOURCES
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 (85.7% in 1997, 80.7% in 1996 and 84.4% in 1995) 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.
YEAR 2000
A significant issue facing not only the insurance industry but society as a whole is potential problems related to the approaching year 2000. Older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs may misinterpret a date, using "00" as the year 1900 rather than year 2000.
During 1996 and 1997 the Company incurred approximately $1.8 million of ex- penses in updating its mangement information system to alleviate potential year 2000 problems. This process is substantially completed, with only testing and peripheral adjustments remaining. The additional expense for the testing and adjustments is expected to be approximately $600,000. As a re- sult of these efforts, the Company is confident that the year 2000 will not cause a significant disruption to its business.
The Company has also assessed the potential impact of year 200 related problems that may be encountered by our agents and third parties, and determined that any impact would not be material relative to the operations of the Company. However, there can be no guarantee that actual results would not differ materially from those anticipated.
Item 8.
Item 8. Financial Statements and Supplementary Data
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, 1997 and 1996.
(4) Consolidated statements of income - for each of the three years in the period ended December 31, 1997.
(5) Consolidated statements of shareholders' investment - for each of the three years in the period ended December 31, 1997.
(6) Consolidated statements of cash flows - for each of the three years in the period ended December 31, 1997.
(7) Notes to consolidated financial statements.
Item 9.
Item 9. Disagreements of Accounting and Financial Disclosures
None.
Item 10.
Item 10. Directors and Executive Officers of CTC
(a) Directors
Item 10. (continued) (b) Executive Officers:
Chairman of the Board and President- George A. Fait (71 years of age) Elected in 1960. Chairman of the Board and President - CIC, CSIC and CFC, wholly-owned subsidiary companies.
Vice President and Treasurer - Paul J. Breitnauer (58 years of age) Elected Treasurer in 1970 and Vice President in 1982. Senior Vice President and Treasurer - CIC, CSIC and CFC.
Secretary - Virgiline M. Schulte (69 years of age) Elected in 1988. Secretary - CIC, CSIC and CFC.
(c) Additional Executive Officers - CIC & CSIC - Wholly-Owned Subsidiary Insurance Companies:
Vice President - P & C Claims Vice President - Personnel Robert F. Miller (59 years of age) Virgiline M. Schulte (69 years Elected in 1986. old) Elected in 1993.
Vice President - Agency Vice President- Data Processing Joel G. Fait (39 years of age) Frank S. Zillner (36 years old) Elected in 1993. Elected in 1993.
Vice President - Rating Corporate Counsel Gerald A. Olson (53 years of age) Vacant Elected in 1993.
Vice President - P & C Underwriting William B. Hutchison (43 years of age) Elected in 1993.
(d) Disclosure of Delinquent Filers
The section captioned "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Capitol Transamerica Corporation ("CTC") Proxy Statement dated April 3, 1998 is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation and Transactions
The sections captioned "Compensation of Directors", "Report on Executive Compensation" and "Executive Compensation Committee Report" in the CTC Proxy Statement dated April 3, 1998 are incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The sections captioned "Principal Shareholders", "Option/SAR Exercised in Last Fiscal Year" and "Compensation Plans" in the CTC Proxy Statement dated April 3, 1998 are incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The section captioned "Compensation Committee Interlocks and Insider Participation" and the three sections referenced in Item 11 above, all included in the CTC Proxy Statement dated April 3, 1998, are in- corporated herein by reference.
George Fait and Virgiline Schulte are brother and sister; Joel Fait is George Fait's son and Frank Zillner is his son-in-law; none of the other officers are related and there are no arrangements or understandings between officers since each is acting solely in their described capacity. There have been no events during the past five years which are material to the evaluation or the ability and integrity of any executive officer of the Company or its subsidiaries.
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1 and 2. Financial statements and financial statement schedules
The following financial statements of Capitol Transamerica Corporation and Subsidiaries are included in Item 8.
Consolidated balance sheets - December 31, 1997 and 1996.
Consolidated statements of income - for each of the three years in the period ended December 31, 1997.
Consolidated statements of shareholders' investment - for each of the three years in the period ended December 31, 1997.
Consolidated statements of cash flows - for each of the three years in the period ended December 31, 1997.
Notes to consolidated financial statements.
The following financial statement schedules of Capitol Transamerica Corporation and Subsidiaries are included in Item 14(d).
Schedule I Summary of Investments Other than Investments in Related Parties
Schedule II Condensed Financial Information of Registrant - Parent Company
Schedule III Supplementary Insurance Information
Schedule IV Reinsurance
Schedule VI Supplemental Information Concerning Property-Casualty Insurance Operations
All other schedules required by Article 7 of Regulation S-K are not required under the related instructions or are inapplicable, and therefore have been omitted.
(b) No Reports on Form 8-K were filed during the fourth quarter of the fiscal year ended December 31, 1997.
(c) Exhibits None
(d) Financial Statement Schedules Reference is made to the financial statement schedules above.
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CAPITOL TRANSAMERICA CORPORATION
By By George A. Fait Paul J. Breitnauer Chairmant of the Board, Vice President, President and Director Treasurer and Director
By By Virgiline M. Schulte Larry Burcalow Secretary Director
By By Michael J. Larson Reinhart H. Postweiler Director Director
By Kenneth P. Urso Director
March 25, 1998
RESPONSIBILITY FOR FINANCIAL REPORTING
To The Shareholders and Board of Directors of Capitol Transamerica Corporation:
The Company has prepared the consolidated financial statements, related notes, and other financial data appearing in this Annual Report. The statements were developed using generally accepted accounting principles and policies considered appropriate in the circumstances. They reflect, where applicable, management's best estimates and judgements. The financial data also includes disclusures and explanations which are relevant to an understanding of the financial affairs of the Company.
To meet management's responsibility for financial reporting, internal control systems and procedures are designed to provide reasonable assurances as to the reliability of the financial records and compliance with corporate policy throughout the organization.
Ernst & Young LLP, independent auditors, have audited the financial statements. To express an opinion thereon, they review and evaluate the Company's internal accounting controls and conduct such tests of the accounting records and other auditing procedures as they deem necessary. The Board of Directors oversees the Company's financial reporting through its Audit Committee, which regularly meets with management representatives and jointly with the independent auditors, to review accounting, auditing and financial reporting matters. A policy of busines ethics is communicated annually to the Company's directors, officers and respon- sible employees. The Company monitors compliance with the policy to help assure that operations are conducted in a responsible and professional manner with a committment to the highest standard of business conduct.
Paul J. Breitnauer Vice President and Treasurer
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Capitol Transamerica Corporation:
We have audited the accompanying consolidated balance sheets of Capitol Trans- america Corporation (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders equity, and cash flows for the three years in the period ended December 31, 1997. Our audits also in- cluded the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing stan- dards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capitol Transamerica Corporation at December 31, 1997 and 1996, and the consolidated re- sults of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
Milwaukee, Wisconsin Ernst & Young LLP February 27, 1998
CAPITOL TRANSAMERICA CORPORATION CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies Capitol Transamerica Corporation (the "Company") is an insurance holding company which writes, through its subsidiaries, commercial insurance coverages in 36 states. The property-casualty insurance coverages represent approximately 70% of the Company's premiums written while fidelity-surety coverages represent approximately 30% of the Company's premiums written. The Company's products are marketed through independent agents located through- out the United States.
The consolidated financial statements are presented in accordance with generally accepted accounting principles. The preparation of financial statements of insurance companies requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates.
(a) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Capitol Indemnity Corpora- tion ("CIC"), Capitol Specialty Insurance Corporation ("CSIC") and Capitol Facilities Corporation ("CFC"). All significant intercompany accounts and transactions have been eliminated in consolidation.
(b) Investments The Company classifies all of its fixed maturities and equity securi- ties as available-for-sale. Accordingly, investments in fixed maturi- ties and equity securities are reported at fair value, with unrealized gains and losses reported in a separate component of shareholders' investment, net of tax effect. The cost of fixed maturities is adjust- ed for amortization of premiums and 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 in- come to carrying values equal to their estimated fair values.
Investment real estate is carried at cost net of accumulated deprecia- tion of $240,551 and $203,830 as of December 31, 1997 and December 31, 1996, respectively.
Cost of investments sold is determined under the specific identifica- tion method.
(c) Premiums Premiums are recognized as revenue on a pro rata basis over the term of the contracts.
(d) Losses and Loss Adjustment Expenses Losses and loss adjustment expenses, less related reinsurance and sub- rogation recoverables, are provided for as claims are incurred. The reserves for losses and loss adjustment expenses include: (1) the accumulation of individual estimates for claims reported on direct business prior to the close of the accounting period; (2) estimates received from other insurers with respect to reinsurance assumed; (3) estimates for incurred but not reported claims based on past experi- ence modified for current trends; and (4) estimates of expenses for investigating and settling claims based on past experience. The lia- bilities recorded are based on estimates resulting from the continu- ing review process. Differences between estimates and ultimate pay- ments are reflected in expense for the period in which the estimates are changed. Management believes that the reserves for losses and loss adjustment expenses are adequate to meet obligations.
(e) Deferred Insurance Acquisition Costs Insurance acquisition costs that vary with, and are directly related to, the production of premiums(principally commissions, premium taxes compensation and certain underwriting expenses) are deferred. Deferred insurance acquisition costs are amortized to expense as the related premiums are earned.
(f) Income Taxes Deferred income taxes reflect the net tax effects of temporary dif- ferences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax reporting.
(g) Income Per Share Net income per share is computed by dividing net income by the weight- ed average number of shares of stock outstanding during the year. Wherever applicable, prior years' information has been restated to reflect the December 31, 1996 three-for-two stock split effected as a fifty percent stock dividend.
In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," which replaces the presentation of primary and fully diluted earnings per share (EPS) with a presentation of basic and diluted EPS. The follow- ing table sets forth the computation of basic and diluted EPS:
(d) The amortized cost of securities on deposit with insurance regulators in accordance with statutory requirements was $3,689,284 on December 31, 1997 and $4,101,301 on December 31, 1996.
In connection with the runoff of the reinsurance assumed operations, CIC has established a security trust fund agreement with a bank, consisting of cash and securities in the amount of $832,192 at December 31, 1997 and $831,095 at December 31, 1996.
(e) Following is a summary of investment income from each category of investments:
(4) Reinsurance (a)Ceded In 1997 and 1996, the Company generally reinsured losses in excess of $1,000,000 with various other companies through reinsurance ceded con- tracts. In 1995 and prior, the Company reinsured losses in excess of $300,000 and $500,000. These arrangements provide for greater diversifi- cation of business, allow the Company to control exposure to potential losses arising from large risks, and provide additional capacity for growth. Reinsurance ceded contracts do not relieve the Company from its obligations to policyholders. The Company remains liable to its policy- holders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements. To minimize its exposure to significant losses from reinsurer insolvencies, the Company evaluates the financial condition of its reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies.
(b)Assumed- Discontinued CIC was involved in providing reinsurance coverage by assuming a portion of risks underwritten by other insurance companies and pools. Although CIC withdrew from this reinsurnace business in 1976, its liability re- mains for losses on policies written during the period in which it par- ticipated as a reinsurer. The Company is involved with treaties that cover certain risks which have had significant development industry-wide over the past several years. The reinsurance assumed loss reserves are based on current information available from the ceding companies and are continually reviewed for accuracy and reasonableness. In 1997 the Com- pany determined that additional IBNR reserves of $4.5 million were ne- cessary to accrue for the estimated development on this business. Man- agement is confident that the reserves of $9,320,722 at December 31, 1997 are adequate, but recognizes the uncertainty industry-wide concern- ing these exposures. The Company has provided letters of credit relating to reinsurance assumed of $503,585 at both December 31, 1997 and 1996.
(c)Assumed - Active In 1997 the Company entered into a reinsurance program whereby CIC as- sumed and then fully ceded $4.8 million in premiums during the year. The Company received a brokerage fee on this business and is not likely to incur any net losses.
Net written and earned premiums and losses and loss adjustment expenses include reinsurance activity as follows:
(5) Income Taxes (a)The Company and its subsidiaries file a consolidated federal income tax return and separate state franchise and premium tax returns as applicable.
(b)The components of income tax expense for the years 1997, 1996 and 1995 are as follows:
(6) Common Stock Options The company has elected to follow Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees' (APB 25) and related Interpreta- tions in accounting for its stock options. Under APB 25, since the exer- cise price of the Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recog- nized. Had the company elected the fair value approach required under FASB 123, "Accounting for Stock-Based Compensation," net income and earn- ings per share would not be materially different for the years 1997, 1996 and 1995.
The Company's 1993 Stock Option Plan has authorized the grant of options for up to 1,072,500 shares of the Company's common stock. All options granted have a five year term and become fully vested at the end of four years. Stock options available to be granted in the future equal 776,999 shares at December 31, 1997.
A summary of the Company's stock activity, and related information for the years ended December 31 follows:
(7) Statutory Reporting (a)The financial statements of the insurance subsidiaries have been prepared in accordance with generally accepted accounting principles, which differ in certain respects from accounting practices prescribed or permitted by insurance regulatory authorities (statutory basis). The statutory capital and surplus and net income of the insurance subsidiaries as reported to state regulatory authorities, were as follows:
(b)CIC is required by the Insurance Commissioner of the State of Wisconsin to maintain a minimum compulsory surplus (surplus as regards policyhold- ers) of 25% of net premiums written during the preceeding twelve months. As of December 31, 1997, the amount of compulsory surplus required to be maintained by CIC was approximately $22,854,463.
(c)State insurance regulations limit the transfer of assets, including divi- dends, from insurance subsidiaries to the Company without regulatory approval.
(8) Contingent Liabilities CIC is a defendant in certain lawsuits involving complaints which demand damages and recoveries for claims and losses allegedly related to risks in- sured by CIC. In the opinion of management, such lawsuits are routine in that they result from the ordinary course of business in the insurance in- dustry. The reserves for losses and loss adjustment expenses include manage- ment's estimates of the probable ultimate cost of settling all losses in- volving lawsuits. See Notes (1)(d), (3) and (4).
(9) Employee Benefit Plans The Company has a defined contribution benefit plan (the Plan) in which all qualified employees are eligible to participate. The Plan incorporates a contributory feature under Section 401(k) of the Internal Revenue Code allowing employees to defer portions of their income through contributions to the Plan. The Company's annual contribution to the Plan is 150% of the first $1,500 of each participant's contribution during the plan year. The Company made contributions of $192,738, $165,397 and $147,872 in 1997, 1996 and 1995, respectively.
The Company also has an Employee Stock Ownership Plan in which all quali- fied employees are eligible to participate. The plan provides for discre- tionary employer contributions of shares of Company stock or cash to pur- chase shares of Company stock. The Company made contributions of $100,103, $120,500 and $89,000 in 1997, 1996 and 1995, respectively.
(10)Underwriting, Acquisition and Insurance Expenses A summary of underwriting, acquisition and insurance expenses incurred during the years ended December 31, 1997, 1996 and 1995 is as follows:
(11)Line of Credit The Company has a line of credit of $10,000,000. There were no borrowings under the line of credit in 1997.
(12)Quarterly Results of Operations (Unaudited)