10-K/A 1 slp99b.txt -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D. C. FORM 10-K/A Amendment No. 1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF l934 For the fiscal year ended December 31, 2000 Commission file number: 0-2047 ----------------- ------ CAPITOL TRANSAMERICA CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) A Wisconsin Corporation 39-1052658 - ------------------------------------ ---------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 4610 University Avenue Madison, Wisconsin 53705-0900 ----------------------------------------- -------------- (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 l934 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 ___ Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [ ]. Based on the closing average of the bid (13 1/4) and asked price (14), the aggregate market value of voting stock held by non-affiliates of the registrant as of March 9, 2001 was approximately $149,177,700. Indicate the number of shares of each of the issuer's class of common stock, as of the latest practicable date: At March 9, 2001 Common Stock, $1.00 Par Value; Issued: 11,560,189 Outstanding: 10,948,822 DOCUMENTS INCORPORATED BY REFERENCE None. Explanatory Note ---------------- This Amendment No. 1 to the Annual Report for the fiscal year ended December 31, 2000 of Capitol Transamerica Corporation (the "Company") is being filed by the Company to amend and restate Item 1 of Part I, Items 6, 7 and 8 of Part II and Item 14 of Part IV. In accordance with Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended, the text of the amended items is amended and restated in its entirety as set forth in this Amendment No. 1. Form 10-K (Annual Report) ------------------------- Capitol Transamerica Corporation -------------------------------- Part I ------ Item 1. Business ------- -------- (a) General Development of Business ---------------------------------- Capitol Transamerica Corporation (CTC) is a holding company with assets exceeding $283 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. CIC writes a complete portfolio of fidelity and surety bonds and specialty insurance coverages, while CSIC has been largely inactive due to market conditions. CIC operates on an admitted basis in thirty-six states and on an excess/surplus lines basis in one state. CFC is a non-insurance entity available for other business opportunities. 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 Performance 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 substantial 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 insurance on selected risks. The Company conducts business with insurance agents located throughout the United States. As of December 31, 2000 and 1999, 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 excess of 10% of the Company's gross premiums in 2000, 1999 or 1998. During 2000, 1999 and 1998, direct premiums written in Wisconsin accounted for approximately 19%, 19% and 17%, respectively, and direct premiums written in Illinois accounted for approximately 14%, 14% and 14%, respectively, of the total direct premiums written by the Company. No other state exceeded 10%. (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 desirable business. 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, 2000, CIC reported $107.9 million in surplus as regards policyholders, approximately $84.6 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 Company's ratios are substantially less than the requirement and had the company not included the excess statutory reserves over statement reserves in reporting to regulatory authorities, surplus would have been $110.6 million at December 31, 2000. Importance and Effect of Licenses: ------------------------------------- Generally speaking, insurance companies must be licensed by 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 approximately 200 people. 2 Item 1(c). (continued) ----------- Information as to Similar Products or Services: ----------------------------------------------------- Gross premiums written, reinsurance ceded and net premiums written for the past five years are as follows:

3 Item 1(c). (continued) -----------

4 (d) 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 earnings or reserves. (2) Significant reserving assumptions including any recent changes. (3) The nature of recent changes in the terms under which reinsurance 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 and circumstances. (6) Unusually large losses or gains. (e) Reconciliation of Loss and Loss Adjustment Expense Reserves: -------------------------------------------------------------------

This table does not present accident or policy year development data, which readers may be more accustomed to analyzing. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. There are no specific provisions for the effects of inflation or other factors which may cause a future change in claim costs. The deficiencies in the early and mid-1990's were due to two factors. First, the continuing operations of the surety & fidelity bonds and property & casualty insurance businesses had explosive growth, going from $12.9 million in gross premiums written in 1985 to $32.7 million in 1991 and $102.1 million in 2000. With this growth came the development of losses over time. The Company addressed these losses by establishing new underwriting standards in 1998 and 1999 and recording reserves using the Company's best estimate for losses and loss adjustment expenses relating to liability for the ultimate cost of reported claims and incurred but not reported claims. Second, along with the rest of the insurance industry that wrote asbestos and environmental liability in the 1960's and 1970's, the Company developed its reserves for potential asbestos and environmental losses as these claims become more apparent from the ceding companies. After consulting with its independent actuary, the Company implemented a reserving methodology widely used to determine reserves for asbestos and environmental claims. The establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain process. The Company regularly updates its reserve estimates as new facts become known and further events occur which may impact the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reflected in the results of operations in the period such changes are determinable. 6 The redundancies in recent years are a direct result of reporting reserves at conservative levels. The Company was involved in providing reinsurance coverage by assuming a portion of risks underwritten by other insurance companies and risk pools, including asbestos and environmental risks. Although the Company withdrew from this reinsurance business in 1976, liability remains for losses on policies written during the period in which it participated as a reinsurer. The discontinued reinsurance assumed loss reserves are based on current information available from the ceding companies and are continually reviewed for accuracy and reasonableness. Establishing net loss reserves for environmental and asbestos claims is subject to uncertainties that are greater than those presented by other types of claims. Among the complications are lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure, unresolved legal issues regarding policy coverage, availability of reinsurance and the extent and timing of any such contractual liability. The legal issues concerning the interpretation of various insurance policy provisions and whether those losses are, or were ever intended to be, covered are complex. Courts have reached different and sometimes inconsistent conclusions as to when losses are deemed to have occurred and which policies provide coverage; what types of losses are covered; whether there is an insurer obligation to defend; how policy limits are determined; how policy exclusions and conditions are applied and interpreted; and whether clean-up costs represent insured property damage. Management believes these issues are not likely to be resolved in the near future. See also Note 4(b) of the Notes to the Consolidated Financial Statements for more discussion of the Discontinued Reinsurance Assumed Business. (g) Reconciliation of Statutory to Generally Accepted Accounting Principles (GAAP) reserves:

7 PART II -------

8 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 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 in 2000 while the fidelity-surety segment accounts for approximately 23% of the Company's business written in 2000. 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 inadequate rates, underwriting losses and, as a result, 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. This combination has resulted in a considerable reduction in underwriting profitability for the industry as a whole. 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. OPERATING RESULTS Total revenues increased by approximately $9.1 million, or 9%, in 2000 compared to 1999 due primarily to higher earned premiums and increases in realized investment gains. Total revenues decreased by approximately $10.6 million, or 9.6%, in 1999 compared to 1998 due to lower earned premiums and decreases in realized investment gains. Underwriting income decreased by $8.3 million in 2000 compared to 1999 due primarily to larger than expected losses on a few specific claims as well as a $6.9 million reserve strengthening for increased premium volume. Underwriting income increased by approximately $770,000 in 1999 compared to 1998 due primarily to decreased loss and loss adjustment expenses. Net income decreased to $14.5 million in 2000 from $16.7 million in 1999 and $19.4 million in 1998. A more detailed analysis of the Company's results of operations follows. 9 Premiums written are earned and recognized as revenues after a reduction for reinsurance ceded and after establishing a provision for the pro rata unearned portion of the premiums written. The following table illustrates the premiums for 1998 through 2000. 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 ============================== =============== ============== ============== Gross premiums written increased by $16.1 million, or approximately 18.7%, in 2000 compared to 1999 and decreased by $1.9 million, or approximately 2.2%, in 1999 compared to 1998. In 1998 and 1999, the Company established new underwriting standards. With new underwriting standards in place, the Company began to increase the gross premiums written in late 1999 and throughout 2000. The fidelity-surety gross premiums written in 2000 grew by approximately 11% compared to 1999 due primarily to volume increases. The property-casualty gross premiums written in 2000 grew by approximately 21% compared to 1999 due primarily to volume increases and to a lesser extent rate increases. The Company's loss and loss adjustment expense levels on a GAAP basis increased to approximately 65.2% of net premiums earned in 2000 compared to approximately 54.7% and 59.1% in 1999 and 1998, respectively. The increase in loss and loss adjustment expenses in 2000 was due primarily to $8.1 million in unexpected losses and $6.9 million in reserve strengthening, both of which are described in more detail below. The Company sustained higher than expected losses on a select group of seven claims in 2000. On the property-casualty side, there were two casualty claims with net incurred losses (after reinsurance) of $3 million and one property claim with net incurred losses of $1 million. On the fidelity-surety side, there were four claims with incurred losses of $4.1 million. The Company took steps to improve its fidelity surety business including not writing new bonds with certain bondholders and canceling certain agents responsible for the production of unprofitable business. Had these losses not occurred, the Company's loss and loss adjustment expense ratio for 2000 would have been approximately 55.5%, a level consistent with the Company's history. After detailed discussions internally and consultations with our independent actuary, management believed it prudent to increase incurred but not reported ("IBNR") reserves in 2000 to address the losses inherent in the insurance business as determined through an actuarial analysis as follows:

10 The Company's operating expenses increased throughout the early and mid-1990's due to explosive premium growth, which, in turn, caused a need for more resources. When the Company established new underwriting standards in 1998 and 1999, the expenses remained at a level consistent with the 1997 level for two reasons. First, fixed expenses will not fluctuate with the premium volume and, second, resource levels, specifically staffing levels, were kept constant in anticipation of future growth. This resulted in the operating expense ratio growing from 32.6% in 1997 to 34.5% in 1998 and 37.4% in 1999. Conversely, the ratio decreased to 36.7% in 2000 because the fixed assets have remained constant and the Company has been able to effectively handle the increased premium volume with essentially the same staffing levels. The Company's operating results from underwriting operations can be measured by the combined loss and operating expense ratios determined in accordance with generally accepted accounting principles ("GAAP"). Under GAAP, the loss, loss adjustment expenses and operating expenses are all stated as a ratio of net premiums earned. The combined ratio is useful because it shows the operating profitability of the Company excluding income from investment-related activities. Alternately stated, it shows the profitability of the insurance operations. A combined ratio greater than 100% means the Company's insurance operations are operating at a loss, which the Company believes is typical on average for the insurance industry in recent years. This, however, does not mean the Company is losing money, because investment income and realized investment gains are also included in the determination of net income. Conversely, if the Company's combined ratio is less than 100%, the insurance operations are operating at a gain. The combined ratio should not be considered in isolation from or as a substitute for net income, cash flows from operating activities or other combined income or cash flow data prepared in accordance with GAAP or as a measure of overall profitability or liquidity. The following table depicts the Company's combined ratios for 1998 through 2000 broken down into its loss and operating expense components on a GAAP basis. 2000 1999 1998 ----------------------------------------------------------------------------- Loss & Loss Adjustment Exp. 65.2% 54.7% 59.1% Operating Expenses 36.7% 37.4% 34.5% ----------------------------------------------------------------------------- Combined Ratio 101.9% 92.1% 93.6% ============================================================================= 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. Investment income has been increasing due to the Company concentrating investing in the fixed maturities market, most notably in tax-exempt municipal bonds. The relationship of the increase in investment in fixed maturities and net investment income is illustrated in the table below. 2000 1999 1998 -------------------------------------------------------------------------------- Fixed Maturities (at amortized cost) $85,369,980 $80,019,257 $68,210,546 Net Investment Income 9,163,062 9,136,244 9,119,936 -------------------------------------------------------------------------------- Realized investment gains fluctuate due to both market conditions and the extent of specific investments that the Company decides to sell. The Company's realized investment gains fluctuated from $13.2 million in 1998 to $8.2 million in 1999 and $11.8 million in 2000. The Company's income tax expense has decreased from $8.6 million in 1998 to $7.2 million in 1999 to $4.5 million in 2000 for two reasons. First, income from underwriting operations has decreased for those periods and, second, the Company's increased investment in municipal bonds has decreased the amount of taxable income. 11 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. 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 serious 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. 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) -------------------------------------------------------------------------------- The net unrealized gain of $4,239,902 for 2000 was comprised of a $1,482,391 unrealized gain on fixed maturities and a $2,757,511 unrealized gain on the Company's equity portfolio. Management has begun to gradually 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 provide an even greater opportunity to invest and build shareholder value over the long term. This appears to be coming to fruition, as evidenced by the current year's increase in unrealized gains. 12 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 discounting of 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 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 $77,980,973 as of December 31, 2000, compared with $77,256,192 as of December 31, 1999 and $78,504,050 as of December 31, 1998. 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 establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain process. The Company regularly updates its reserve estimates as new facts become known and further events occur which may impact the resolution of unsettled claims. Changes in prior year reserve estimates, which may be material, are reflected in the results of operations in the period such changes are determinable. 13 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 (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 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's investment portfolio is actively managed to minimize downward price risk. 14 SEGMENT INFORMATION 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) reinsurance assumed operations. These segments constitute 100% of the operations of the Company. The Company maintains and monitors its segment information on a statutory basis. Financial data by segment, including a reconciliation to consolidated GAAP basis, for 1998 through 2000 is in footnote 13 to the Financial Statements. The property and casualty segment provides specialty commercial coverages for beauty and barber shops, bowling alleys, contractors/manufacturers, day care centers, restaurants, detective/guard agencies, golf courses and taverns. This segment also provides nurses professional, deerhunters and sportsmen's accident, and special event coverages. The fidelity and surety segment offers a full range of surety and fidelity bonds, including contractor's payment and performance bonds, license/permit bonds, fiduciary and judicial bonds, as well as commercial fidelity bonds. The reinsurance assumed segment consists of active reinsurance assumed and discontinued reinsurance assumed. The Company's discontinued reinsurance assumed business involved providing reinsurance coverage by assuming a portion of the risks underwritten by other insurance companies and risk pools, including asbestos and environmental risks. Although the Company withdrew from this reinsurance business in 1976, liability remains for losses on policies written during the period in which it participated as a reinsurer. The Operating Results section discussed the premium growth as well as the loss and loss adjustment expenses for the fidelity-surety and property-casualty lines of business. Discontinued reinsurance assumed had an underwriting income of $1.3 million for 2000, compared to an underwriting loss of $522,000 and $470,000 for 1999 and 1998, respectively. In 2000, the Company decreased IBNR reserves by $2 million after consultation with the independent actuary retained by the Company to assess the adequacy of these reserves. Had the Company not decreased these reserves, the Company would have had an underwriting loss of $694,000 in 2000, compared to an underwriting loss of $522,000 and $470,000 in 1999 and 1998, respectively. In addition to the discontinued reinsurance assumed, the Company is involved in active reinsurance assumed business, which is described in footnote 4(c) to the Financial Statements. The active reinsurance assumed business has a minimal effect on the overall underwriting operations of the Company, contributing underwriting income of $108,000, $101,000 and $59,000 for 2000, 1999 and 1998, respectively. Commissions, other underwriting expenses, investment income and income taxes are allocated by line of business as described below. Commissions and other underwriting expenses are allocated to the lines of business based on premium volume and weighted average salaries by full-time equivalent employees. Investment income is allocated by line of business as well as to capital and surplus based on a complex formula that incorporates premium volume, reserves and surplus to allocate among the different lines of business as well as to capital and surplus. Income taxes are allocated to the lines of business based on the effective tax rates for the different items affecting income - investment income (dividends, interest and capital gains) and underwriting income. YEAR 2000 In prior years, the Company discussed the nature and progress of its plans to become year 2000 ready. In 1999 the Company completed its remediation and testing of systems. As a result of the planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the year 2000 date change. 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. 15 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, 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. 16 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, 2000 and 1999. Consolidated statements of income - for each of the three years in the period ended December 31, 2000. Consolidated statements of shareholders' investment and comprehensive income- for each of the three years in the period ended December 31, 2000. Consolidated statements of cash flows - for each of the three years in the period ended December 31, 2000. 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, 2000. (c) Exhibits The following is filed as an exhibit to this Report: Exhibit No. Description ---------- ----------- 23 Consent of Ernst & Young LLP, independent auditors. (d) Financial Statement Schedules Reference is made to the financial statement schedules above. 17 SIGNATURES ---------- Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of l934, the Company has duly caused this amendment to report to be signed on its behalf by the undersigned, thereunto duly authorized on the _______ day of October, 2001. CAPITOL TRANSAMERICA CORPORATION By: /s/ George A. Fait ------------------------------- George A. Fait Chairman of the Board, President and Director 18 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 accounting principles generally accepted in the United States and policies considered appropriate in the circumstances. They reflect, where applicable, management's best estimates and judgments. The financial data also includes disclosures and explanations that 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 assurance 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 the independent auditors, both with and without management present, to review accounting, auditing and financial reporting matters. A policy of business ethics is communicated annually to the Company's directors, officers and responsible employees. The Company monitors compliance with the policy to help assure that operations are conducted in a responsible and professional manner with a commitment to the highest standard of business conduct. Paul J. Breitnauer Vice President and Treasurer -------------------------------------------------------------------------------- REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Shareholders and Board of Directors of Capitol Transamerica Corporation: We have audited the accompanying consolidated balance sheets of Capitol Transamerica Corporation (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' investment and comprehensive income, and cash flows for the three years in the period ended December 31, 2000. Our audits also included 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 auditing standards generally accepted in the United States. 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, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. 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. Ernst & Young LLP Milwaukee, Wisconsin February 16, 2001 19

The accompanying notes to the consolidated financial statements are an integral part of these financial statements. 20

The accompanying notes to the consolidated financial statements are an integral part of these financial statements. 21

The accompanying notes to the consolidated financial statements are an integral part of these financial statements. 22

The accompanying notes to the consolidated financial statements are an integral part of these financial statements. 23

The accompanying notes to the consolidated financial statements are an integral part of these financial statements. 24 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 37 states. The property-casualty insurance coverages represent approximately 77% of the Company's premiums written while fidelity-surety coverages represent approximately 23% of the Company's premiums written. The Company's products are marketed through independent agents located throughout the United States. The consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States ("GAAP"). 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 Corporation ("CIC"), Capitol Specialty Insurance Corporation ("CSIC") and Capitol Facilities Corporation ("CFC"). All significant inter-company accounts and transactions have been eliminated in consolidation. (b) Investments ----------- The Company classifies all of its fixed maturities and equity securities as available-for-sale. Accordingly, investments in fixed maturities 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 adjusted for 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 statement of income to carrying values equal to their estimated fair values. Investment real estate is carried at cost net of accumulated depreciation of $1,595,693 and $1,173,643 as of December 31, 2000 and December 31, 1999, respectively. The real estate is depreciated over the estimated useful life of the asset. Cost of investments sold is determined under the specific identification method. (c) Premiums -------- Premiums are recognized as revenue on a pro-rata basis over the term of the contracts. Approximately 18.5% and 13.9% of the total premiums written are on risks located in Wisconsin and Illinois, respectively. No other state exceeds 10%. (d) Loss and Loss Adjustment Expenses ------------------------------------- Losses and loss adjustment expenses less related reinsurance and subrogation recoverable, 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 experience modified for current trends; and (4) estimates of expenses for investigating and settling claims based on past experience. The liabilities recorded are based on estimates resulting from the continuing review process, and differences between estimates and ultimate payments are reflected in expense for the period in which the estimates are changed. 25 (e) Deferred Insurance Acquisition Costs --------------------------------------- Deferred 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 differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax reporting. (g) Income Per Share ------------------ Basic income per share is computed by dividing net income by the weighted-average number of shares of stock outstanding during the year. Diluted income 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 EPS:

(h) 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, consists of 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 changes in shareholders' investment and comprehensive income (loss). (i) Reclassifications ----------------- Certain reclassifications have been made to the 1999 financial statements to conform with the 2000 presentation. 26 (2) Investments ----------- (a) The amortized cost and estimated fair value of fixed maturities and equity securities are as follows:

(b) The amortized cost and estimated fair value of fixed maturities at December 31, 2000, by contractual maturity, is shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Fair Cost Value ---------------------------------------------------------------- Due in one year or less $ - $ - Due after one year through five years 3,014,408 3,125,891 Due after five years through ten years 10,295,355 10,745,902 Due after ten years 72,060,217 76,970,018 ---------------------------------------------------------------- Total $85,369,980 $90,841,811 ================================================================ 27 (c) Realized gains (losses) and change in unrealized gains (losses) for the three years ended December 31, 2000, 1999 and 1998 are as follows:

Following is a summary of total unrealized gains (losses) as of December 31, 2000, 1999 and 1998:

(d) The fair value of securities on deposit with insurance regulators in accordance with statutory requirements was $3,936,264 at December 31, 2000 and $3,927,732 at December 31, 1999. In connection with the reinsurance assumed operations, CIC has established security trust fund agreements with a bank, consisting of cash and securities in the amount of $835,000 at December 31, 2000 and $865,000 at December 31, 1999. 28 (e) Following is a summary of investment income from each category of investments:

(f) The Company had investments in state, municipal and political subdivision bonds with amortized costs of $84,236,162 and $78,855,846 at December 31, 2000 and 1999 respectively. Approximately 93% of these bonds were special assessment revenue bonds and approximately 7% of these bonds were state and political subdivision obligations at December 31, 2000 and 1999. The Company monitors its exposure by investing its funds in accordance with guidelines set by the Company's investment committee. At December 31, 2000, approximately 40% of the municipal bond portfolio consisted of securities of Wisconsin and Minnesota. No other state total exceeded 10%. (g) Fair values for fixed maturities and equity securities are determined from quoted market prices where available, or are estimated using values obtained from independent pricing services. Thinly traded fixed maturities are individually priced based upon year-end market conditions, type of security, interest rate and maturity of the issue. (3) Reserves for Losses and Loss Adjustment Expenses ------------------------------------------------------ The table below provides a reconciliation of the beginning and ending reserves for losses and loss adjustment expenses, net of reinsurance: 29

30 The Company continually reviews its reserves for losses and loss adjustment expenses and the related reinsurance recoverables. As explained in Note (1)(d), differences between estimates and ultimate payments are reflected in expense for the period in which the estimates are changed. As a result of the variability in these estimates, reserves have differed from actual experience during 2000, 1999 and 1998. The actuarial estimates are based on past claim experience and consider current claim trends and premium volume as well as social and economic conditions. While the Company has recorded its best estimate of its reserves for losses and loss adjustment expenses, it is reasonably possible these estimates, net of estimated reinsurance recoverables, may change in the future. See Note 4(b) for a discussion of discontinued assumed reinsurance. (4) Reinsurance ----------- (a) Ceded ----- From 1996 through 2000, the Company reinsured losses in excess of $1,000,000 with various other companies through reinsurance ceded contracts. These arrangements provide for greater diversification of business, allow the Company to control exposure to potential losses arising from large risks, and provide additional capacity for growth. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. Reinsurance ceded contracts do not relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders 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 losses from reinsurer insolvencies, the Company continually evaluates the financial condition of its reinsurers. (b) Assumed - Discontinued ------------------------ The Company was involved in providing reinsurance coverage by assuming a portion of risks underwritten by other insurance companies and risk pools, including asbestos and environmental risks. Although the Company withdrew from this reinsurance business in 1976, liability remains for losses on policies written during the period in which it participated as a reinsurer. The discontinued reinsurance assumed loss reserves are based on current information available from the ceding companies and are continually reviewed for accuracy and reasonableness. Management believes that the reserves of $7,344,795 at December 31, 2000 are adequate, but recognizes the uncertainty industry-wide concerning these exposures. Establishing net loss reserves for environmental and asbestos claims is subject to uncertainties that are greater than those presented by other types of claims. Among the complications are lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure, unresolved legal issues regarding policy coverage, availability of reinsurance and the extent and timing of any such contractual liability. The legal issues concerning the interpretation of various insurance policy provisions and whether those losses are, or were ever intended to be covered, are complex. Courts have reached different and sometimes inconsistent conclusions as to when losses are deemed to have occurred and which policies provide coverage; what types of losses are covered; whether there is an insurer obligation to defend; how policy limits are determined; how policy exclusions and conditions are applied and interpreted; and whether clean-up costs represent insured property damage. Management believes these issues are not likely to be resolved in the near future. The Company has provided a letter of credit relating to reinsurance assumed of $130,000 at both December 31, 2000 and 1999. 31 (c) Assumed - Active ------------------ CIC participates in reinsurance programs in the accident and health and commercial multiple peril lines of business. The exposure on this business is minimal. Net written and earned premiums and losses and loss adjustment expenses included in this reinsurance activity are 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 2000, 1999 and 1998 are as follows:

(c) A reconciliation of the effective income tax rate, as reflected in the consolidated statements of income, to the statutory federal income tax rate, is as follows:

33 (d) Significant components of the deferred tax liabilities and assets are as follows:

34 (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 Interpretations in accounting for its stock options. Under APB 25, since the exercise price of the Company's stock options equals the market price of the underlying stock at the date of the grant, no compensation expense is recognized. The Company did recognize $25,476 in compensation expense during 2000 under FASB Interpretation 44 effective July 1, 2000 for APB 25 related to options which were repriced to the stockmarket value in 1999. Had the Company elected to follow the fair value method under SFAS 123 "Accounting for Stock-Based Compensation", net income and earnings per share would not be materially different for the years 2000, 1999, and 1998. Pro forma disclosure is required and has been determined as if the Company had accounted for its stock options under this method. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2000, 1999, and 1998, respectively: risk-free interest rates of 6.4%, 6.1%, and 4.4%; dividend yields of 2.4%, 2.0%, and 1.4%; volatility factors of the expected market price of the Company's common stock of .394, .394 and .345; and a weighted-average expected life of the options of two and one-half years. The weighted-average fair value of options granted for the years 2000, 1999, and 1998 was $3.03, $2.29, and $3.92, respectively. The estimated fair value is amortized to expense over the options' vesting period. The Company's pro forma information follows:

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 721,011 shares at December 31, 2000. 35 A summary of the Company's stock option activity, and related information for the years ended December 31 follows:

Options exercisable at December 31, 2000 were 64,890. The weighted average remaining exercise period for all outstanding options as of December 31, 2000 was 4.0 years. Exercise prices for options outstanding as of December 31, 2000 ranged from $4.37 to $12.50 with 44%, and 52% having exercise prices of $9.69 and $10.66, respectively. 36 (7) Statutory Reporting -------------------- (a) The financial statements of the insurance subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States, 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:

The Company's underwriting results can be measured by the combined loss and expense ratios. Losses and loss adjustment expenses are stated as a ratio of net premiums earned, while underwriting expenses are stated as a ratio of net premiums written. The following table depicts the Company's two subsidiary insurance companies' combined ratios on a statutory basis. 2000 1999 1998 --------------------------------- ----------- ------------ ------------- Loss and Loss Adjustment Exp. 65.4% 54.9% 59.4% Underwriting Expense 35.1% 37.0% 35.6% --------------------------------- ----------- ------------ ------------- Combined Ratio 100.5% 91.9% 95.0% ================================= =========== ============ ============= The Company's combined ratios continue to compare very favorably with the industry average, as indicated by the following chart. Combined Ratio 2000 1999 1998 ------------------------------------------------------------------------ Company 100.5% 91.9% 95.0% Industry * 109.3% 110.2% 105.9% ------------------------------------------------------------------------ *The industry number for 2000 is the ratio for commercial carriers at September 30, 2000. The industry date is based upon the report published by Insurance Services Offices, Inc. entitled "Property/Casualty Insurance Industry Financail Results: Nine-Months 2000 Analysis" dated as of December 15, 2000. 37 Please reference Item 7 (Management Discussion and Analysis) for an analysis of the significance of the combined ratio and what it means to an insurance company. (b) 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, 2000, the amount of compulsory surplus required to be maintained by CIC was $23,350,674. (c) In accordance with state insurance regulations, the insurance subsidiaries can distribute dividends to the Company of the lesser of their net income or 10% of their surplus without regulatory approval. (d) The National Association of Insurance Commissioners (NAIC) revised the Accounting and Procedures Manual in a process referred to as Codification, with the revised manual becoming effective January 1, 2001. The revised manual has changed, to some extent, prescribed statutory accounting practices and will resultin changes to the accounting practices CIC and CSIC use to prepare their statutory-basis financial statements. Management believes the impact of these changes to CIC's and CSIC's statutory-basis capital and surplus as of January 1, 2001 will be insignificant. (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 insured by CIC. In the opinion of management, such lawsuits are routine in that they result from the ordinary course of business in the insurance industry. The reserve for losses and loss adjustment expenses include management's estimates of the probable ultimate cost of settling all losses involving 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 contributions during the plan year. The Company made contributions of $250,637, $242,511 and $214,839 in 2000, 1999 and 1998, respectively. The Company also has an Employee Stock Ownership Plan in which all qualified employees are eligible to participate. The plan provides for discretionary employer contributions of shares of Company stock or cash to purchase shares of Company stock. The Company made contributions of $301,000, $179,000 and $100,000 in 2000, 1999 and 1998, respectively. (10) Underwriting, Acquisition and Insurance Expenses ---------------------------------------------------- A summary of underwriting, insurance acquisition costs and insurance expenses incurred during the years ended December 31, 2000, 1999 and 1998 is as follows:

38 Included in net commissions is the fair value of CTC stock purchased by CIC and issued to agents as part of a contingent commission agreement. The amounts expensed were $201,212, $478,880 and $468,858 for the years 2000, 1999 and 1998, respectively. Deferred insurance acquisition costs are amortized over the term of CIC insurance contracts. The amount of deferred insurance costs amortized was $28,431,941, $28,325,677 and $27,833,262 in 2000, 1999 and 1998, respectively. (11) Credit Lines ------------- The Company has credit lines of $11,200,000. There were no significant borrowings during 2000, and none outstanding as of December 31, 2000. (12) Quarterly Results of Operations (Unaudited) -----------------------------------------------

39 (13) 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) reinsurance assumed operations. These segments constitute 100% of the operations of the Company. The property and casualty segment provides specialty commercial coverages for beauty and barber shops, bowling alleys, contractors/manufacturers, day care centers, restaurants, detective/guard agencies, golf courses and taverns. This segment also provides nurses professional, deerhunters and sportsmen's accident, and special event coverages. The fidelity and surety segment offers a full range of surety and fidelity bonds, including contractor's payment and performance bonds, license/permit bonds, fiduciary and judicial bonds, as well as commercial fidelity bonds. The reinsurance assumed segment consists of active reinsurance assumed and discontinued reinsurance assumed. The Company's discontinued reinsurance assumed business involved providing reinsurance coverage by assuming a portion of the risks underwritten by other insurance companies and risk pools, including asbestos and environmental risks. Although the Company withdrew from this reinsurance business in 1976, liability remains for losses on policies written during the period in which it participated as a reinsurer. The Company maintains and monitors its segment information on a statutory basis. Financial data by segment, including a reconciliation to consolidated GAAP basis, for 1998 through 2000 follows in the table below. In analyzing this information, keep the following discussion in mind. The reconciliation items to get to the consolidated GAAP basis come from three sources: operating income from non-insurance operations, investment income on capital and surplus, and intercompany eliminations (management fees for intercompany services provided and dividend income on parent company stock held by affiliates). Specifically, loss adjustment expenses are adjusted for intercompany eliminations from management fees, other underwriting expenses are adjusted for operating expenses from non-insurance operations and intercompany eliminations related to the management fees, investment and other income is adjusted for investment income from non-insurance operations and capital and surplus and intercompany eliminations for management fees and intercompany dividends. Finally, the tax adjustment is the tax on the investment income attributable to capital and surplus. The reconciliation to GAAP for net income is the net effect of the reconciliation amounts above.

The Company operates in 37 states, with all business conducted within the United States. No customer represents greater than 10% of the Company's revenue. There have been no material intersegment transactions. 42 SCHEDULE I CAPITOL TRANSAMERICA CORPORATION SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES As of December 31, 2000

43 SCHEDULE II

The accompanying condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto of Capitol Transamerica Corporation. 44 SCHEDULE II (continued)

The accompanying condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto of Capitol Transamerica Corporation. 45 SCHEDULE III

46 SCHEDULE IV

47 SCHEDULE VI

48 EXHIBIT INDEX Exhibit No. Description ----------- ------------ 23 Consent of Ernst & Young LLP, independent auditors. 49

CAPITOL TRANSAMERICA CORP 10-K/A