<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--- ---
COMMISSION FILE NUMBER 0-8483
CENTRAL RESERVE LIFE CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-1017531
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17800 ROYALTON ROAD, STRONGSVILLE, OHIO 44136
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 572-2400
--------------
---------------------------------
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
1934 during the preceding 12 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 ( )
The number of shares outstanding of the registrant's Common stock at September
30, 1995 was 4,037,400.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
A. Consolidated Condensed Balance Sheets
B. Consolidated Condensed Statements of Income
C. Consolidated Condensed Statements of Cash Flows
D. Notes to Consolidated Condensed Financial Statements
- 2 -
<PAGE> 3
<TABLE>
CENTRAL RESERVE LIFE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<CAPTION>
September 30 December 31
1995 1994
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
Investments:
Fixed maturities held to maturity, at amortized cost $ 12,846,573 $ 13,468,956
Fixed maturities available for sale, at fair value 71,364,336 67,409,309
--------------- ---------------
Total fixed maturities 84,210,909 80,878,265
Policy loans 109,097 101,146
Short-term investments, at cost which approximate market 9,005,736 2,250,912
--------------- ---------------
Total investments 93,325,742 83,230,323
Cash 7,095,078 7,654,487
Accrued investment income 1,287,665 1,315,937
Premiums receivable 1,666,731 1,656,225
Property and equipment, at cost 11,611,327 12,053,737
Deferred federal income taxes 538,710 935,282
Federal income taxes recoverable - 245,406
Other assets 929,302 852,761
---------------- ---------------
$ 116,454,555 $ 107,944,158
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits, losses and claims $ 29,513,314 $ 27,496,885
Other policy claims and benefits payable 35,436,011 35,219,992
Other policyholders' funds 5,746,959 5,751,966
Federal income taxes payable 244,022 -
Other liabilities 4,623,892 6,258,829
---------------- ---------------
75,564,198 74,727,672
Mortgage note payable 8,621,514 8,685,754
---------------- ---------------
Total liabilities 84,185,712 83,413,426
---------------- ---------------
Commitments and contingencies
Shareholders' equity:
Non-Voting Preferred shares, no par value - -
Common shares, no par value, stated value $.50 2,018,700 2,018,650
Additional paid-in capital 3,476,315 3,475,690
Net unrealized holding gain (loss) 100,595 (5,427,055)
Retained earnings 26,673,233 24,463,447
---------------- ---------------
Total shareholders' equity 32,268,843 24,530,732
---------------- ---------------
$ 116,454,555 $ 107,944,158
================ ===============
</TABLE>
- 3 -
<PAGE> 4
<TABLE>
CENTRAL RESERVE LIFE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
September 30 September 30 September 30 September 30
1995 1994 1995 1994
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 58,400,268 $ 56,392,400 $ 173,332,633 $ 168,116,344
Net investment income 1,708,679 1,571,167 4,822,893 4,770,629
Net realized investment gains 68,016 45,910 143,287 208,778
Other income - 5,890 12,420 24,563
-------------- ----------------- -------------- --------------
60,176,963 58,015,367 178,311,233 173,120,314
-------------- ----------------- -------------- --------------
BENEFITS, LOSSES AND EXPENSES
Benefits, claims, losses and settlement 41,101,257 39,287,191 121,421,753 117,626,849
expenses
Commissions 8,353,716 8,384,212 25,027,884 25,226,319
Other operating expenses 8,637,620 8,239,914 26,312,359 24,930,251
-------------- ----------------- -------------- --------------
58,092,593 55,911,317 172,761,996 167,783,419
-------------- ----------------- -------------- --------------
Income before federal income taxes 2,084,370 2,104,050 5,549,237 5,336,895
Federal income tax expense 812,000 635,160 1,886,000 1,745,950
-------------- ----------------- -------------- --------------
Net Income $ 1,272,370 $ 1,468,890 $ 3,663,237 $ 3,590,945
============== ================= ============== ==============
Weighted average shares outstanding 4,229,074 4,217,485 4,216,765 4,208,905
-------------- ----------------- -------------- --------------
Net income per share $ .30 $ .35 $ .87 $ .85
============== ================= ============== ==============
</TABLE>
- 4 -
<PAGE> 5
<TABLE>
CENTRAL RESERVE LIFE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
NINE MONTHS ENDED
September 30
1995 1994
-------------- ----------------
<S> <C> <C>
INSURANCE COMPANY ACTIVITIES
Cash provided by operating activities 5,958,973 11,646,831
Purchases of investments (19,285,282) (25,545,285)
Sales or maturities of investments 14,616,827 14,900,269
Purchase of property and equipment (418,410) (213,992)
Dividends paid (1,425,000) (1,312,500)
-------------- ----------------
Increase (decrease) in cash from insurance (552,892) (524,677)
activities -------------- ----------------
NON-INSURANCE ACTIVITIES
Dividends from subsidiaries 1,425,000 1,312,500
Dividends paid to shareholders (1,453,452) (1,329,183)
Other, net 21,935 260,259
------------- ----------------
Increase from non-insurance activities (6,517) 243,576
------------- ----------------
Cash at beginning of period 7,654,487 6,069,187
------------- ----------------
Cash at end of period $ 7,095,078 $ 5,788,086
============= ================
</TABLE>
- 5 -
<PAGE> 6
CENTRAL RESERVE LIFE CORPORATION
AND SUBSIDIARIES
D. Notes to Consolidated Condensed Financial Statements
----------------------------------------------------
1. These consolidated condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1994,
as certain information and footnote disclosures required to be included
with financial statements prepared in accordance with generally accepted
accounting principles have either been condensed or omitted.
2. The consolidated condensed balance sheets at September 30, 1995 and the
consolidated condensed statements of income and cash flows for the nine
months ended September 30, 1995 and 1994 were prepared without audit. In
the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial
position as of September 30, 1995 and the results of operations for the
nine months then ended and cash flows for the nine months then ended.
3. The Federal income tax returns for the Company and its subsidiaries have
been examined by the Internal Revenue Service (IRS) for 1991 and 1992.
During the third quarter of 1994, the IRS issued a proposal for adjustments
to the Company's returns for 1991 and 1992. The proposed deficiencies are
approximately $2.4 million of which $215,303, pertaining to some non
deductible expenses and certain assets expensed and not capitalized, was
agreed to and paid in 1994. The balance primarily deals with whether or
not the Company's subsidiary, Central, qualified as a life company, for tax
purposes. The Company intends to vigorously protest the proposed
deficiency and management believes existing law supports the Company's
position. Therefore, the Company has not recorded a liability for the
difference.
If the IRS were to pursue litigation and prevail in its position that
Central no longer qualifies as a life company for tax purposes, Federal
income taxes would increase in the future. Presently, as a small
life company, Central is permitted, among other things, a deduction from
the first $3 million of income of 60% or $1.8 million. As Central's income
increases above $3 million, the special deduction is reduced
proportionately. Besides relying on favorable existing case law, Central
may have, under certain circumstances, the ability to change and market
policies that could insure its qualification as a life company for tax
purposes in the future, if the need arises.
4. The results of operations for the nine months ended September 30, 1995 are
not necessarily indicative of the results for the full year.
- 6-
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES: The assets of the Company and its
major subsidiary, Central Reserve Life Insurance Company ("Central"), increased
approximately 8% for the period ended September 30, 1995. Central primarily
invests in bonds which amounts to about 72% of the total assets. Central does
not have any so-called "junk" bonds or what is considered high yield type
securities and 99% of the bonds are of investment grade quality. Current
assets and short term investments (not including government bonds of over $18
million which have a ready market) amounted to about 16% of total assets. In
accordance with SFAS 115 the Company recorded an increase in fixed maturities
available for sale of $100,595 at September 30, 1995, to reflect the reporting
of certain investments at fair value which was higher than amortized cost. This
compares to a recorded reduction of $5,427,055 at December 31, 1994. The
excess of fair value over the cost is reflected in shareholders' equity.
Reserves and accruals for future claim payments increased
approximately 4% from $62,716,877 at December 31, 1994 to $64,949,325 at
September 30, 1995. Shareholders' equity increased to $32,268,843 at September
30, 1995 or $7,738,111 after dividend payments and a $5,527,650 net increase
due to the SFAS 115 adjustment.
RESULTS OF OPERATIONS: During the last nine months, premiums
increased to $173,332,633 compared to $168,116,344 for the same period last
year. This represents a 3% increase in 1995 over 1994 as compared to a 9%
increase in 1994 over 1993. The increase is in the Group division, which
accounts for approximately 99% of the premiums. Net certificates inforce for
the nine months increased 7,768 to 110,727 or 8%, compared to a net decrease of
3,415 or 3%, for the same period last year. New certificates issued for the
period were 34,175 compared to 22,962 in 1994. Lapses were slightly higher,
26,407 in 1995, compared to 26,377 in 1994. The higher lapses are primarily
due to a short term type product issued to individuals which has been
increasing in number of certificates, but tends to have a lower persistency
than group type products, and a block of business which did not renew its
coverage.
Net investment income increased 1% to $4,822,893 for the nine month
period ending September 30, 1995, compared to $4,770,629 for the same period in
1994. Although total investments increased 12% to $93,325,742, lower interest
rates and an increase in the allocation of proceeds from certain investments
sold to short term investments attributed to the small increase.
Policy benefits, claims, losses and settlement expenses increased 3% to
$121,421,753 from $117,626,849 in 1994. The incurred loss ratio for the
period was 70.1% in 1995 and 70% in 1994. For the quarter, the Company's loss
ratio was 70.4% in 1995 and 69.7% for the quarter in 1994. An increase in
large accidental claims in the third quarter of 1995 compared to the same
quarter in 1994 was the primary reason for the increase in the loss ratio from
69.7% to 70.4%.
- 7 -
<PAGE> 8
Reserves and accruals for future claim payments increased 4% from
December 31, 1994 to $64,949,325. Shareholder's equity had a net increase of
$7,738,111 of which $5,527,650 was due to the net fair value increase in
investments recorded under SFAS 115, otherwise an increase of $2,210,461 would
have resulted, after dividend payments.
Commissions were 14.4% of premiums for the period ending September 30,
1995, as compared to 15% for the same period in 1994. For the quarter, the
ratio was 14.3% compared to 14.9% in 1994. The decrease is due to the normal
commission decrease as first year business goes into the renewal years, plus a
decrease in commission rates for certain products sold in 1995.
Other operating expenses increased 6% for the nine month period in 1995
and were 15.2% of premiums compared to 14.8% for the same period in 1994. The
Company continues to monitor its expenses and look for areas of cost
reductions.
The Company had net income, after federal income taxes, of $1,272,370
($.30 per share) for the third quarter ending September 30, 1995 and $3,663,237
($.87 per share) for the nine months ending September 30, 1995. This compares
to net incomes, after federal income taxes, of $1,468,890 ($.35 per share) for
the third quarter ending September 30, 1994 and $3,590,945 ($.85 per share) for
the nine months ending September 30, 1994. Book value at September 30, 1995
was $7.99 ($7.97 before unrealized gains) compared to $6.08 ($7.42 before
unrealized losses) at December 31, 1994.
Federal income taxes would increase in the future if the IRS, as
indicated in note 3 to the consolidated condensed financial statements, were to
pursue litigation and prevail in their position that Central no longer
qualifies as a life company for tax purposes. Presently, as a small life
company, Central is permitted, among other things, a deduction from the first
$3,000,000 of income of 60% or $1,800,000, which is decreased by 15% for
amounts over $3,000,000. As Central's income increases the effect is lowered.
Management is relying on existing case law applied favorably to another
taxpayer to resolve this issue. Also, Central may have, under certain
circumstances, the ability to change and market policies that could insure it's
qualification as a life company for tax purposes in the future, if the need
arises.
IMPACT OF INFLATION: Inflation rates impact the financial statements
and operating results in several areas. Changes in inflation rates impact the
market value of the investment portfolio and yields on new investments.
Inflation has had an impact on claim costs and overall operating costs
and although it has been lower in the last few years, hospital and medical
costs have still increased at a higher rate than general inflation. While to a
certain extent these increased costs are offset by interest rates (investment
income), hospital charges increased, more than interest rates did. The Company
will continue to increase premium rates in accordance with trends in hospital
and medical costs along with concentrating on various cost containment
programs.
- 8 -
<PAGE> 9
PART II - OTHER INFORMATION
---------------------------
All items of Part II other than Item 6 are either inapplicable to
Registrant or would not require a response.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
a) Exhibits.
Exhibit 11 - Statement Regarding Computation of Per Share
Earnings.
Exhibit 27 - Financial Data Schedule.
b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
- 9 -
<PAGE> 10
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTRAL RESERVE LIFE CORPORATION
Date: November 9, 1995 By: Frank W. Grimone
---------------------------- -------------------------
Frank W. Grimone
Executive Vice President
Date: November 9, 1995 By: Frank W. Grimone
---------------------------- -------------------------
Frank W. Grimone
Principal Financial Officer
and Chief Accounting Officer
- 10 -
<PAGE> 11
Exhibit 11
----------
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
-----------------------------------------------------
Net income per share is computed using the weighted average number of
common shares outstanding. These shares were increased by the number of shares
issuable on the exercise of options, reduced by the number of shares assumed to
have been purchased with the proceeds from the exercise of these common stock
equivalents. The number of shares used to calculate the earnings per share was
4,216,765 for the nine month period ending September 30, 1995 and 4,208,905 for
the nine month period ending September 30, 1994.
- 11 -
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 71,364,336
<DEBT-CARRYING-VALUE> 12,846,573
<DEBT-MARKET-VALUE> 12,631,411
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 93,325,742
<CASH> 7,095,078
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 116,454,555
<POLICY-LOSSES> 29,513,314
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 35,436,011
<POLICY-HOLDER-FUNDS> 5,746,959
<NOTES-PAYABLE> 8,621,514
<COMMON> 2,018,700
0
0
<OTHER-SE> 30,250,143
<TOTAL-LIABILITY-AND-EQUITY> 116,454,555
173,332,633
<INVESTMENT-INCOME> 4,822,893
<INVESTMENT-GAINS> 143,287
<OTHER-INCOME> 12,420
<BENEFITS> 121,421,753
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 51,340,243
<INCOME-PRETAX> 5,549,237
<INCOME-TAX> 1,886,000
<INCOME-CONTINUING> 3,663,237
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,663,237
<EPS-PRIMARY> .87
<EPS-DILUTED> .87
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
