<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 COMM. FILE NO. 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 IDENTIFICATION NUMBER
INCORPORATION OR ORGANIZATION)
17800 Royalton Road, Strongsville, Ohio 44136
--------------------------------------- ---------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(216) 572-2400
------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Shares, without 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
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant.
$31,289,075 computed based on the closing price of the
Common Shares on March 14, 1995.
The number of Common Shares, without par value, outstanding as of March 14,
1995: 4,037,300.
- --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May
18, 1995, into Part III, Items 10, 11, 12, and 13.
- --------------------------------------------------------------------------------
<PAGE> 2
PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
Central Reserve Life Corporation (the "Registrant") was incorporated in
1964 as Citation Life Insurance Company under the laws of the State of Ohio. The
present name was adopted in 1976. Unless the context indicates otherwise, the
term "Company" as herein used will refer to Central Reserve Life Corporation
only.
The Company is a holding company conducting its business through several
subsidiaries. More detailed information regarding the Company's subsidiaries is
set forth below.
(1) INSURANCE OPERATIONS
The Company owns 100% of Central Reserve Life Insurance Company
("Central"), which is its principal operating subsidiary.
Central is an Ohio domiciled Life and Accident and Health insurance
company. Central was incorporated in 1963 and commenced business in 1965. The
Company acquired Central in 1973. As of December 31, 1994, Central was licensed
to transact business in Alabama, Arizona, Arkansas, Colorado, Delaware, Florida,
Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Michigan,
Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Carolina,
North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South
Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin and Wyoming
(35 states).
(2) OTHER OPERATIONS
In March 1983, the Company acquired Western Reserve Administrative
Services, Inc. ("Western"), an Ohio corporation which administers claims for
self-insured companies. Western also administers Central's Gemini product which
is a partially self-funded group plan for small companies.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
<TABLE>
The following table presents the amount of Premiums, Investment Income and
Operating Income (loss) on a GAAP basis for the last three (3) years
attributable to the Company's industry segments. The Company is not required to
allocate investment assets or identifiable assets by industry segment.
<CAPTION>
1994 1993 1992
--------------- ------------ ------------
<S> <C> <C> <C>
Premiums
Group Life................................. $ 4,828,115 $ 4,988,762 $ 4,480,629
Group Accident and Health.................. 217,731,794 202,850,443 167,045,729
Other...................................... 1,119,162 891,635 483,656
--------------- ------------ ------------
Total.............................. $ 223,679,071 $208,730,840 $172,010,014
============== =========== ===========
Net Investment Income
Group Life................................. $ 13,576 $ 78,172 $ 106,052
Group Accident and Health.................. 4,925,857 4,322,475 3,762,587
Annuities.................................. 1,143,151 676,606 334,247
Other...................................... 433,343 289,931 403,150
--------------- ------------ ------------
Total.............................. $ 6,515,927 $ 5,367,184 $ 4,606,036
============== =========== ===========
Income (loss) before Federal income tax:
Group Life................................. $ 1,201,115 $ 1,561,268 $ 119,621
Group Accident and Health.................. 6,554,173 2,375,362 3,035,178
Annuities.................................. (790,429) (1,234,413) (534,798)
Other...................................... (91,870) 402,322 869,635
--------------- ------------ ------------
Total.............................. $ 6,872,989 $ 3,104,539 $ 3,489,636
============== =========== ===========
Annuity considerations not included in
premiums per SFAS 97....................... $ 3,492,402 $ 8,728,902 $ 3,152,029
============== =========== ===========
</TABLE>
1
<PAGE> 3
(C) NARRATIVE DESCRIPTION OF BUSINESS
The operational aspects of the Company's business are primarily in Central;
therefore, this section will contain information that only pertains to Central.
(1) BUSINESS AND PRINCIPAL PRODUCT
Products
Central specializes in group insurance for small businesses. Among the
products the Company offers are group and individual life, annuities, group
accident and health, long-term disability, short-term major medical, dental and
other related health insurance products.
Central's principal product is group insurance, which accounted for about
99% of its premiums in 1994. Approximately 2% of the group premiums were for
life insurance and 98% were for accident and health insurance.
Central provides for its customers a comprehensive package of more than 25
managed care controls which help (a) keep insureds' out-of-pocket expenses down,
(b) ensure affordability of the plans, and (c) keep rates attractive at renewal
time. Among these managed care controls are inpatient and outpatient billing
review, a hospice care program, individual case management, independent
utilization review, physician code review, hospital audit review, premium
reduction renewal options, and the National Physician Data Bank Review-SM, a
refinement of our former reasonable and customary charge controls.
Included as part of Central's managed care programs are preferred provider
organization (PPO) health plans which are available to both groups and
individuals. Through its PPO plans, Central is able to offer customers a network
of hospitals and physicians that provide medical services at discounted rates.
Regional PPO networks which Central contracts with are situated in 16 states.
For its customers located outside the existing PPO networks, Central offers a
supplemental hospital program, through which it can offer discounted medical
rates by contracting with a national PPO network.
Marketing
Central's products are marketed through the establishment of general
agencies in Midwestern, Southeastern, and Southwestern states. Regional sales
managers are responsible for recruiting and training the general agents. The
general agents are required to recruit agents in their area, conduct seminars
for the agents and train them in the benefits, underwriting requirements and
general conditions under which Central's insurance plans operate.
Central supports the general agents in the recruiting and training of
agents through sales brochures and literature, assistance with seminars, a video
training program and a computer-based training program. The Company enhances and
enables the general agents' and writing agents' sales efforts through its Co-op
Advertising Program, sales and promotional literature and various sales
contests.
Internally, Central's organization supports the agents and emphasizes
customer service with a unique "team" approach. Organized around geographically
dedicated groups of employees, each team consists of several specialists for
each region.
Underwriting
Central controls the quality of its group accident and health business by
maintaining specific underwriting standards and guidelines. Where not restricted
by state regulatory agencies, the Company medically underwrites each individual
by requiring enrollment applications, medical health history questionnaires and,
in some cases, medical records.
While members of each group are individually underwritten, Central takes
into account certain group characteristics, such as size, location and industry.
For a discussion of certain business risks, other than underwriting, see Note 1
to the consolidated financial statements.
2
<PAGE> 4
(2) INSURANCE VOLUME, POLICIES AND CERTIFICATES
Although insurance volume (amount of life insurance) is generally a guide
to statistical information for most insurance companies, policies and
certificates in force are a more informative statistic for Central due to the
large percent of business generated in the group accident and health area.
Central requires each insured to carry group life insurance, but the average
requirement is only $10,000, accordingly, it is more informative to focus on the
number of certificates in force as opposed to volume of insurance.
<TABLE>
Following are tables reflecting statistical information on Central's
business.
<CAPTION>
1994 1993 1992
-------------- -------------- --------------
<S> <C> <C> <C>
LIFE INSURANCE VOLUME:
Insurance Written..................... $ 459,830,000 $ 517,829,000 $ 438,981,000
In force.............................. $1,012,860,000 $1,016,513,000 $ 913,891,000
Reinsured............................. $ 41,424,000 $ 13,608,000 $ 15,200,000
GROUP POLICIES:
Beginning of Year..................... 40,491 31,654 21,034
Issued during Year.................... 22,400 26,764 21,956
Terminations.......................... (21,506) (17,927) (11,336)
-------------- -------------- --------------
End of Year........................... 41,385 40,491 31,654
============= ============= =============
GROUP CERTIFICATES:
Beginning of Year..................... 105,536 96,175 78,875
Issued during Year (new).............. 31,270 36,586 36,834
Terminations (net of additions)....... (33,847) (27,225) (19,534)
-------------- -------------- --------------
End of Year........................... 102,959 105,536 96,175
============= ============= =============
</TABLE>
(3) GEOGRAPHIC DISTRIBUTION
<TABLE>
The geographic distribution of direct premiums and annuity considerations
received (before reinsurance) by Central during 1994 is as follows:
<CAPTION>
PERCENT OF
STATE AMOUNT TOTAL
----- ------------ ------------
<S> <C> <C>
Ohio.................................... $ 80,792,951 35.3%
Indiana................................. 20,581,023 9.0
Arizona................................. 16,303,312 7.1
Pennsylvania............................ 13,883,350 6.1
Michigan................................ 13,778,361 6.1
Colorado................................ 12,876,710 5.6
Alabama................................. 10,289,409 4.5
Tennessee............................... 9,926,240 4.3
West Virginia........................... 8,560,019 3.7
Virginia................................ 7,512,701 3.3
North Carolina.......................... 7,263,589 3.2
Missouri................................ 7,261,548 3.2
Other................................... 19,573,877 8.6
------------ ------
Total......................... $228,603,090 100.0%
=========== ============
</TABLE>
(4) AGENTS
Central's insurance policies are sold by licensed agents and general agents
(brokers). Regional Sales Managers service the brokers. Central does not have
agents who sell exclusively for it. The licensed agents and brokers who produce
insurance business for Central generally have affiliations with and serve in a
similar capacity for one or more other companies which may be competitive with
Central, and a portion of their business may be written by such other companies.
Such agents and brokers are compensated by Central for business produced by them
on a cash commission basis at rates which are believed to be competitive with
those of other life insurance companies.
As of December 31, 1994, Central had 84 brokers/general agents and 13,147
agents licensed.
3
<PAGE> 5
(5) INVESTMENTS
An important earnings factor for Central, as well as all insurance
companies, is the income from the investment portfolio. The investment
objectives for insurance companies are designed to maximize yields, preserve
principal and maintain liquidity. Investments must comply with the insurance
laws of the state of domicile. These laws prescribe the kind, quality and
concentration of investments which may be made. Due to the restrictive nature of
these laws, there may be occasions when Central may be precluded from making
certain otherwise attractive investments. As of December 31, 1994, 99% of the
$86,305,320 invested in fixed maturities, was of investment grade quality.
Central and the Company do not invest in "junk" bonds or derivatives such as
futures, forward, swap, and option contracts, and other financial instruments
with similar characteristics.
<TABLE>
The following tables show various aspects of the investment portfolio of
the Company as of December 31, 1994:
<CAPTION>
CARRYING
VALUE PERCENT
----------- --------
<S> <C> <C>
PORTFOLIO MATURITY
Due in one year or less.......................................... $ 2,414,426 3.0%
Due after one year through five years............................ 11,512,551 14.2
Due after five years through ten years........................... 25,124,819 31.1
Due after ten years.............................................. 5,484,283 6.8
-----------
44,536,079
Mortgage-backed securities (7.5 average years)................... 36,342,186 44.9
----------- --------
$80,878,265 100.0%
========== ========
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED FAIR CARRYING
COST VALUE VALUE PERCENT
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
PORTFOLIO DISTRIBUTION
U.S. Treasury Securities............ $18,116,720 $17,174,057 $17,832,646 22.1%
Obligations of states,
municipalities and political
subdivisions..................... 1,250,018 1,143,092 1,143,092 1.4
Corporate bonds..................... 25,598,088 23,143,290 23,143,290 28.6
Convertible bonds................... 2,008,831 1,986,601 1,986,601 2.5
Foreign bonds....................... 503,133 430,450 430,450 .5
Mortgage-backed securities:
Federal Home Loan Mortgage....... 16,281,262 15,237,758 15,579,477 19.3
Federal National Mortgage........ 11,166,814 10,136,459 10,298,347 12.7
Other............................ 11,380,454 10,477,287 10,464,362 12.9
----------- ----------- ----------- --------
$86,305,320 $79,728,994 $80,878,265 100.0%
========== ========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED
COST PERCENT
----------- --------
<S> <C> <C>
QUALITY RATING
Government....................................................... $45,564,795 52.8%
Aaa.............................................................. 7,791,637 9.0
Aa............................................................... 3,655,372 4.2
A................................................................ 19,925,213 23.1
Baa.............................................................. 8,558,869 9.9
Ba............................................................... 577,422 .7
NR............................................................... 232,012 .3
----------- --------
$86,305,320 100.0%
========== ========
</TABLE>
4
<PAGE> 6
(6) RESERVES
Central is required by the insurance laws of the states in which it is
licensed to set up statutory reserves to meet policy obligations on its ordinary
life policies. These reserves are amounts which, with additions from premiums to
be received and with interest on such reserves compounded annually at certain
assumed rates, are calculated to be sufficient to meet policy obligations as
they mature. The various actuarial factors are determined from mortality tables
and interest rates in effect when the policy is issued. The ordinary life
policies currently issued by Central are valued on the Commissioner's Standard
Ordinary Table of Mortality of 1980 under the Commissioners' Reserve Valuation
Method and the Net Level Premium Method. The guaranteed interest rate on
policies currently being issued is 5.2%. On policies issued previously to the
current series, guaranteed interest rates were as specified in the various
policies and range from 2.5% to 6%. Under the Commissioners' Reserve Valuation
Method, the amount of reserve provided in the first policy year is less than
under the Net Level Premium Method, but in subsequent years greater additions to
reserves are required. To the extent that the rate of income realized on
investments is greater or less than the assumed interest rate used in the
calculation of reserves, reported earnings are increased or decreased, as the
case may be.
The majority of Central's reserves and liabilities for claims, however, are
for its group accident and health business. Statutory and regulatory
requirements are generally less explicit for health insurance reserves and
liabilities than for ordinary life insurance. For its group accident and health
business Central establishes an Active Life Reserve plus a liability for due and
unpaid claims, claims in course of settlement, and incurred but unreported
claims as well as a reserve for the present value of amounts not yet due on
claims. These reserves and liabilities are dependent upon many factors, such as
economic and social conditions, inflation (overall and hospital costs
specifically), changes in doctrines of legal liability and damage awards for
pain and suffering. Therefore, the reserves and liabilities established are
necessarily based on extensive estimates and prior years' statistics.
(7) REINSURANCE
As is customary among most insurance companies, Central reinsures portions
of the life insurance policies it writes, thereby providing a greater
diversification of risk and minimizing Central's exposure on major risks. While
the effect of reinsurance is to lessen risks to the writing company, it may also
lower income. Although the ceding of reinsurance does not discharge the original
insurer from its primary liability to its policyholder, the insurance company
that assumes the coverage assumes the related liability and becomes the ultimate
source of payment. The maximum amount of exposure that Central retains on any
life is $50,000 on ordinary life and $25,000 on group life on ages through 70.
No retention is maintained over age 70. Maximum retention on impaired risks is
$10,000. Central also has reinsurance on group accident and health claims. Under
a reinsurance treaty in effect during 1994 Central is liable for incurred claims
in any one year for the deductible of $250,000 per person. In addition to the
deductible Central will also retain claims from $250,000 to $500,000 up to a
minimum accumulation of $3,000,000, above which reinsurance payments are made to
Central. Each individual claim is also separately reinsured for 100% in excess
of $500,000. Effective January 1, 1995, Central's reinsurance treaty provides
that all individual claims in excess of $500,000 are 100% reinsured. The overall
effect of reinsurance is not material to the Company's financial condition.
Reinsurance treaties in effect at December 31, 1994 were with The Cologne Life
Reinsurance Company, Life ReAssurance Corporation of America and Business Men's
Assurance Company.
(8) REGULATION
Central, in common with other insurance companies operating in the states
in which it is licensed, is subject to regulation and supervision by state
insurance regulatory agencies. These regulatory bodies have broad administrative
powers relating to standards of solvency, which must be met on a continuing
basis, granting and revoking of licenses, licensing of agents, approval of
policy forms, maintenance of adequate reserves, form and content of financial
statements, types of investments permitted, issuance and sale of stock and other
matters pertaining to insurance. Central is required to file detailed annual
statements with the respective state regulatory bodies and is subject to
periodic examination by the regulators. The most recent regulatory examination
for Central was made as of December 31, 1992. The next examination is scheduled
for the year ending December 31, 1995.
5
<PAGE> 7
(9) COMPETITION
The insurance business is highly competitive. There are over 1,600 legal
reserve life insurance companies in the United States, of which over 650 are
operating in Ohio, Central's principal state of operation. Many of these have
been in business for long periods of time, and have substantially greater
financial resources, larger selling organizations and broader diversification of
risks than Central. Many of these companies are mutual companies, whose earnings
inure to the benefit of their policyholders. However, the Company believes that
the policies and premium rates of Central are generally competitive with those
offered by other companies selling similar types of insurance in Ohio.
(10) EMPLOYEES
As of December 31, 1994 Central had 485 employees. The Registrant has no
employees of its own.
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
The Company has no foreign operations. Its domestic operations during 1994
were primarily in Ohio.
ITEM 2. PROPERTIES
The Company owns its home office building, located at 17800 Royalton Road,
Strongsville, Ohio. The building, which consists of 121,625 square feet of gross
floor area, was occupied in late 1990 by the Company and all the subsidiaries.
Central, the principal operating subsidiary, entered into a 15 year triple net
lease agreement with the Company for 100% of the space. All operations are
conducted in this building.
ITEM 3. LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental to the business, neither
the Company nor any of its subsidiaries is party to any material pending legal
proceeding nor is any of their property the subject thereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders through the solicitation of
proxies or otherwise.
EXECUTIVE OFFICERS OF THE COMPANY AND CENTRAL
Pursuant to Instruction 3 to Item 401(b) of Regulation S-K, the following
information is reported below.
<TABLE>
(a) The executive officers of the Company and Central are as follows:
<CAPTION>
NAME OF OFFICER
EXECUTIVE OFFICER AGE POSITION SINCE
- ----------------------- -------- ----------------------------------- ----------------
<S> <C> <C> <C>
Fred Lick, Jr. 63 Chairman of the Board, 2/74
Chief Executive Officer, President
and Director
Frank W. Grimone 59 Executive Vice President, 5/74
Chief Financial Officer and
Treasurer
Glen A. Laffoon 55 Executive Vice President and Chief 12/74
Administrative Officer
</TABLE>
The current one year terms of office of the executive officers listed above
began May 26, 1994, with their election to office by the Board of Directors at
its meeting following the annual meeting of shareholders held on such date.
There are no arrangements or understandings known to the Company between any
executive officer and any other person pursuant to which any officer was elected
to office. There is no family relationship between any director or executive
officer and any other director or executive officer of the Company.
6
<PAGE> 8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
<TABLE>
(a) The Company's Common Shares are traded on the Nasdaq Stock Market under
the symbol CRLC. The following table shows the representative high and low
prices of the Common Shares for the calendar quarters indicated. These prices
were taken from the Nasdaq Monthly Statistical Reports.
<CAPTION>
HIGH LOW DIVIDENDS
-------- -------- ------------
<S> <C> <C> <C>
1993
First Quarter............ $9 5/8 $6 3/4 $ .10
Second Quarter........... 8 5 1/8 .10
Third Quarter............ 6 7/8 5 1/8 .10
Fourth Quarter........... 8 1/2 5 3/4 .10
1994
First Quarter............ $8 $7 $ .11
Second Quarter........... 8 7/8 6 3/4 .11
Third Quarter............ 8 5/8 7 3/4 .11
Fourth Quarter........... 8 1/2 7 7/8 .11
</TABLE>
(b) As of March 14, 1995, there were 1,746 record holders of the Common
Shares.
(c) The cash dividends paid by the Company in the past two years are
indicated in the table above. The Company's present source of income, other than
a nominal amount of investment income, is dividends and rent from Central.
Central, the main operating subsidiary, is subject to certain restrictions which
are contained in the Insurance Holding Company statute (Ohio Revised Code
3901.34) which prevent Central from paying the Company, without the approval of
the Ohio Superintendent of Insurance, any dividend from other than earned
surplus (as defined in the statute) or any dividend whose value, together with
the value of other dividends paid or distributions made within the preceding 12
months, exceeds the greater of (i) 10% of Central's surplus as regards
policyholders as of the December 31 next preceding the dividend payment, or (ii)
the net income of Central for the 12-month period ended the December 31 next
preceding the dividend payment. The Company believes it will be able to continue
paying dividends. Payment, however, will be determined by the Company's Board of
Directors based on an analysis of the Company's earnings, applicable regulatory
restrictions, the competitive climate in which the Company operates, and other
relevant considerations.
7
<PAGE> 9
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR:
Premiums................. $223,679,071 $208,730,840 $172,010,014 $140,982,753 $135,050,792
Net Investment Income.... 6,515,927 5,367,184 4,606,036 4,481,145 4,472,649
Gain (loss) on Sale of
Investments............ (23,024) 707,741 514,679 165,416 345,925
Other Income............. 29,237 5,662 1,697 33,060 30,097
------------ ------------ ------------ ------------ ------------
Total Revenues........... $230,201,211 $214,811,427 $177,132,426 $145,662,374 $139,899,463
=========== =========== =========== =========== ===========
Income before Federal
Income Taxes........... $ 6,872,989 $ 3,104,539 $ 3,489,636 $ 4,217,522 $ 5,001,197
Federal Income Taxes
(Benefit).............. 2,059,228 714,190 (34,581) 1,118,577 1,080,448
Cumulative effect of
Statement 109 as of
January 1, 1991........ -- -- -- 170,669 --
------------ ------------ ------------ ------------ ------------
Net Income............... $ 4,813,761 $ 2,390,349 $ 3,524,217 $ 2,928,276 $ 3,920,749
=========== =========== =========== =========== ===========
Net Income Per Share..... $1.14 $ .57 $ .85 $ .71 $ .96
Cash Dividends Per
Share.................. $ .44 $ .40 $ .36 $ .32 $ .28
AT YEAR END:
Investments.............. $ 83,230,323 $ 79,030,628 $ 59,305,499 $ 44,645,676 $ 50,290,023
Total Assets............. $107,944,158 $103,613,338 $ 85,028,970 $ 69,921,639 $ 69,024,598
Mortgage Note Payable.... $ 8,685,754 $ 8,764,615 $ 8,836,356 $ 8,904,022 $ 8,500,000
Future Policy Benefits
and Claims Payable..... $ 62,716,877 $ 56,148,504 $ 38,836,847 $ 28,931,749 $ 31,635,755
Retained Earnings........ $ 24,463,447 $ 21,422,301 $ 20,640,995 $ 18,553,097 $ 16,892,269
Shareholders' Equity..... $ 24,530,732 $ 26,856,896 $ 26,015,001 $ 23,798,571 $ 21,938,151
Equity Per Share:
After net unrealized
holding loss........ $6.08 $6.67 $6.49 $6.00 $5.55
Before net unrealized
holding loss........ $7.42 N/A N/A N/A N/A
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
LIQUIDITY:
Liquidity is the ability of an enterprise to generate adequate amounts of
cash to meet its financial commitments. The major needs for cash for the Company
are Central Reserve Life Insurance Company's (Central) ability to pay claims and
expenses as they come due. Central's primary sources of cash are premiums and
investment income. Central's payments consist of current claim payments to
insureds, managed care expenses, operating expenses such as salaries, employee
benefits, commissions, taxes, etc., and shareholder dividends payable to the
Company. By statute, the state regulatory authorities set minimum liquidity
standards to protect both policyholders and shareholders and limit the dividends
payable by Central to the Company. See Item 5.
The majority of the Company's assets are in investments which were
$83,230,323, after a net unrealized holding loss of $5,427,055 (see below), or
77% of the total assets at December 31, 1994. Fixed maturities are
8
<PAGE> 10
the primary investment of the Company and were $80,878,265 or 97% of total
investments at December 31, 1994. The Company is carrying fixed maturities of
$13,468,956 at amortized cost (held to maturity) and fixed maturities of
$67,409,309 at fair value (available for sale) at December 31, 1994. The Company
does not hold any so-called "junk" bonds or what are generally considered
high-yield type securities, and 99% of the bonds are of investment grade
quality. In accordance with SFAS 115, the Company recorded a reduction in
investments of $5,427,055 to reflect the reporting of investments classified as
available for sale at fair value (estimated market value) which was lower than
amortized cost. Management believes the Company's positive cash flow from
investment income and operations will enable the Company to operate without
having to sell the investments that have the unrealized holding loss of
$5,427,055. The charge is reflected in shareholders' equity as a "net unrealized
holding loss". In addition to the fixed maturities, the Company also had $4.2
million in unrestricted cash and $2.2 million in short term investments at
December 31, 1994. Central also has an unused $1 million line of credit with a
major bank. During 1994, total assets increased about $9.3 million, before the
net unrealized holding loss of $5,427,055 or 9% to $113,219,213, mainly due to a
positive cash flow from operations during the year from premiums and investment
income.
Liabilities accrued for future policy benefits and policy claims payable
increased 12%, or about $6.6 million to $62,716,877 primarily because of a
strengthening of reserves and increased premiums. Shareholders' equity decreased
$2,326,164 after paying dividends of $1,772,615 and a reduction of $5,427,055
for a net unrealized holding loss.
CAPITAL RESOURCES:
The only long-term debt the Company has at December 31, 1994, is
$8,685,754, which is the principal amount payable under a loan secured by a
mortgage on the Company's home office building. The Company entered into the
loan agreement in 1990 for $9 million for a term of 10 years bearing interest at
9 1/2% per annum with a 30 year amortization period payment schedule. At the
same time, the Company also entered into a 15 year lease agreement with Central
for 100% of the space. The Company will use the monthly rental payments to pay,
among other expenses, the required mortgage loan payments. No major capital
expenditures occurred in 1994 nor are any anticipated for 1995.
RESULTS OF OPERATIONS:
1994 compared to 1993
During 1994, premiums increased 7% to $223,679,071 from $208,730,840 in
1993. The increase was primarily in the group division which accounted for about
99% of total premiums. Group certificates in force decreased to 102,959 in 1994
from 105,536 in 1993. Certificates issued for new group policies were 31,270 in
1994, down from 36,586 in 1993. Management believes that the health care reform
bill activity in 1994 caused many policyholders to remain with their existing
coverage and others not to seek new coverage. Also certain new state mandates
curtailed some sales in some states, until the Company made certain adjustments
to comply with those mandates. Total lapses (net of additions/decreases) in 1994
were 33,847 compared to 27,225 in 1993. The increase is due to a combination of
certain groups that were not renewed and the continued higher lapses in an
association type product which is being used as a short term policy.
Not included in premiums, for generally accepted accounting principles
(GAAP) purposes, are annuity considerations in the amounts of $3,492,402 and
$8,728,902 for 1994 and 1993. The decrease in annuity considerations was
primarily due to increasing interest rates available in other investments.
Net investment income increased 21% to $6,515,927 from $5,367,184 in 1993.
Favorable cash flows in 1994 and 1993 aided in the increase in investments,
primarily fixed maturities which generated the majority of the investment
income. Offsetting the effect of the increase in investments was the effect of
lower interest rates during the first half of 1994.
Benefits and claims incurred expenses increased 6% in 1994 to $155,257,560
from $146,017,738 in 1993. This compares to a 28% in 1993 over 1992. The
incurred loss ratio was 69.4% in 1994 and 69.9% in 1993. The improvement can be
attributed to managed care cost controls, certain rate adjustments, reduction in
large claims and an overall moderation in the medical inflation rate for 1994.
9
<PAGE> 11
Commissions increased 5% to $33,573,278 in 1994 from $32,120,808 in 1993
and were 15% of premiums in 1994 compared to 15.4% in 1993. The decrease in the
ratio is primarily due to the increase in renewal premiums, which carry a lower
commission than new business. Expenses increased 3% in 1994 over 1993 and were
15.4% of premiums compared to 16.1% in 1993.
Net income tax expense as a percentage of pretax income was 30% in 1994
compared to 23% in 1993. The current portion of the tax, increased to $1,534,817
from $769,833 in 1993. The main reason for the increase in current taxes is the
increase in pretax income. The increase in the deferred tax expense is primarily
due to the increase in the valuation allowance. Since the Company's recovery
rates for prior years are lower than current tax rates a higher valuation
allowance is required. Also in the valuation allowance is $1,845,199 recorded
directly to shareholders' equity for the net unrealized holding loss, offsetting
the same amount shown as a deferred tax asset.
Net income for 1994 was $4,813,761 or $1.14 per share compared to
$2,390,349 or $.57 per share in 1993. The increase is primarily due to a 21%
increase in investment income, slightly lower benefit loss ratio of 69.4%
compared to 69.9% in 1993 and a decrease in the ratio of operating expenses to
premiums from 16.1% to 15.4%. Because group accident and health represents 97%
of Central's business, investment income and a lower loss ratio from this
division has a positive effect on the Company's earnings. Along with an increase
in investment income in the group accident and health division, the statutory
loss ratio decreased to 67.9% in 1994 from 69.5% in 1993.
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.
RESULTS OF OPERATIONS:
1993 Compared to 1992
During 1993, premiums increased 21% to $208,730,840 from $172,010,014 in
1992. The increase was primarily in the group division which accounted for about
99% of total premiums. Group certificates in force increased to 105,536 in 1993
from 96,175 in 1992. Certificates issued for new group policies were 36,586 in
1993 and 36,834 in 1992. Total lapses (net of additions/decreases) in 1993 were
27,225 compared to 19,534 in 1992. Management attributes the increase in lapses
to a product sold through an association which appears to be used as a short
term policy. Also, decreases in certificates in existing groups exceeded
additions during the year, indicating reductions in employment in many
companies.
Not included in premiums, for generally accepted accounting principles
(GAAP) purposes, are annuity considerations in the amounts of $8,728,902 and
$3,152,029 for 1993 and 1992.
Net investment income increased 16% to $5,367,184 from $4,606,036 in 1992.
Favorable cash flows in 1992 and 1993 aided in the 33% increase in investments.
Offsetting the effect of the increase in investments was the effect of lower
interest rates since the Company primarily invests in fixed maturities. The
Company continued its conservative investment policy in 1993, buying investment
grade securities. In 1993 net realized
10
<PAGE> 12
gains were $707,741 compared to $514,679 in 1992. The major portion of the net
realized gains was due to calls.
Benefits and claims incurred expenses increased 28% in 1993 to $146,017,738
from $114,394,481 in 1992. This produced an incurred loss ratio of 69.9% in 1993
compared to 66.5% in 1992. A higher number of large claims than expected was
experienced during the first six months of 1993. This was the main reason for
the increase in the loss ratio for the current year. Reserves were strengthened
and the large claims experience leveled off during the last six months of 1993.
Commissions increased 20% in 1993 over 1992 and were 15.4% of premiums in
1993, down slightly from 15.6% in 1992. The decrease in the ratio to premiums
was primarily due to the increase in renewal premiums which carry a lower
commission rate than new, first year premiums. Expenses increased 3% in 1993
over 1992 compared to a 32% increase in 1992 over 1991 and were 16.1% of
premiums in 1993 compared to 18.9% for 1992. Major reasons for the 3% increase
were increases in premium taxes.
IMPACT OF INFLATION:
Inflation rates impact the Company's financial condition 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, while the rate of income from investments decreased.
The Company will continue to establish premium rates in accordance with trends
in hospital and medical costs along with concentrating on various cost
containment programs.
LEGISLATIVE DEVELOPMENTS:
In November 1994, voters sent a message to Congress that they did not want
a drastic overhaul of the health care system. It now appears that no major
federal health care reform will take place in 1995. However, incremental changes
are more probable than major changes and it is more likely this will be on the
state level than federal. The federal government has already enacted a series of
health care mandates which has resulted in cost shifting from the federal
government to state government and the private sector. The Company cannot
predict the ultimate timing or effect of such legislative efforts, and no
assurance can be given that any such efforts will not have a material adverse
effect on the Company's business and results of operations.
NEW ACCOUNTING STANDARDS:
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". SFAS 115 addresses the
following points:
(a) Debt securities that management has the positive intent and
ability to hold to maturity would be classified as "held to maturity" and
reported at amortized cost.
(b) Debt and equity securities that are held for the purpose of
selling in the near term would be classified as "trading securities" and
would be reported at fair value, with unrealized gains and losses, net of
tax, included in earnings.
(c) Debt and equity securities not classified as either held to
maturity or trading securities would be classified as "available for sale"
and would be reported at fair value, with unrealized gains and losses, net
of tax, excluded from earnings and reported as a separate component of
shareholders' equity.
SFAS 115 was effective for fiscal years beginning after December 15, 1993
and the Company adopted it as required January 1, 1994. The Company has
identified various securities as available for sale. Effective January 1, 1994,
the Company started to carry these fixed maturities at fair value and
accordingly recorded a net unrealized holding loss of $5,427,055 at December 31,
1994 as a separate component of shareholders'
11
<PAGE> 13
equity. All other fixed maturities will be classified as held to maturity and
will continue to be carried at amortized cost.
In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments". The statement requires disclosure about the
fair value of financial instruments and is effective for financial statements
issued for fiscal years ending after December 15, 1995 for entities, such as the
Company, with less than $150 million in total assets.
In October 1994, the FASB issued SFAS 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments". This statement
requires disclosure about derivative financial instruments and amends existing
requirements of SFAS Nos. 105 and 107. SFAS 119 is effective for financial
statements issued for fiscal years ending after December 15, 1995, for entities
with less than $150 million in total assets.
As of December 31, 1994, the Company does not own nor has it purchased any
derivatives as defined in SFAS 119.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
<TABLE>
CENTRAL RESERVE LIFE CORPORATION
INDEX
<CAPTION>
PAGE
---------------------
<S> <C>
Independent Auditors' Report.................................... 13
Consolidated Balance Sheets as of December 31, 1994 and 1993.... 14
Consolidated Statements of Income for the years ended
December 31, 1994, 1993 and 1992.............................. 15
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1994, 1993 and 1992........................ 16
Consolidated Statements of Cash Flows
for the years ended December 31, 1994, 1993 and 1992.......... 17
Notes to Consolidated Financial Statements for the years
ended December 31, 1994, 1993 and 1992........................ 18
Schedule I -- Summary of Investments -- Other than Investments
in Related Parties............................................ 31
Schedule III -- Condensed Financial Information of
Registrant -- Central Reserve Life Corporation (Parent
Only)......................................................... 32, 33, 34
Schedule V -- Supplementary Insurance Information............... 35
Schedule VI -- Reinsurance...................................... 36
</TABLE>
12
<PAGE> 14
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Central Reserve Life Corporation:
We have audited the consolidated financial statements of Central Reserve
Life Corporation and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial position of Central
Reserve Life Corporation and subsidiaries as of December 31, 1994 and 1993, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
As discussed in note 1 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, in 1994.
KPMG Peat Marwick LLP
Columbus, Ohio
February 24, 1995
13
<PAGE> 15
<TABLE>
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1993
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
ASSETS
Investments (Note 2):
Fixed maturities held to maturity, at amortized cost....... $ 13,468,956 $ --
Fixed maturities available for sale, at fair value......... 67,409,309 --
Fixed maturities, principally, at amortized cost........... -- 72,438,641
------------ ------------
Total fixed maturities........................... 80,878,265 72,438,641
Policy loans............................................... 101,146 91,978
Short-term investments, at cost which approximate market... 2,250,912 6,500,009
------------ ------------
Total investments................................ 83,230,323 79,030,628
Cash (Note 2)................................................ 7,654,487 6,069,187
Accrued investment income.................................... 1,315,937 1,009,110
Premiums receivable.......................................... 1,656,225 1,909,296
Property and equipment, at cost, net of accumulated
depreciation of $5,642,595 and $5,146,068, respectively
(Note 1)................................................... 12,053,737 13,005,400
Deferred federal income taxes (Note 5)....................... 935,282 1,459,693
Federal income taxes recoverable............................. 245,406 345,450
Other assets................................................. 852,761 784,574
------------ ------------
$107,944,158 $103,613,338
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits, losses and claims.................. $ 27,496,885 $ 24,145,004
Other policy claims and benefits payable (Note 3).......... 35,219,992 32,003,500
Other policyholders' funds................................. 5,751,966 5,970,185
Other liabilities.......................................... 6,258,829 5,873,138
------------ ------------
74,727,672 67,991,827
Mortgage note payable (Note 6)............................... 8,685,754 8,764,615
------------ ------------
Total liabilities................................ 83,413,426 76,756,442
------------ ------------
Commitments and contingencies (Notes 5, 7, 8 and 9)
Shareholders' equity: (Notes 4 and 10)
Non-Voting Preferred shares, no par value, authorized
2,000,000 none issued................................... -- --
Common shares, no par value, stated value $.50, authorized
10,000,000, issued and outstanding 4,037,300 in 1994 and
4,024,382 in 1993 (325,970 are reserved for options).... 2,018,650 2,012,191
Additional paid-in capital................................. 3,475,690 3,422,404
Net unrealized holding loss................................ (5,427,055) --
Retained earnings.......................................... 24,463,447 21,422,301
------------ ------------
Total shareholders' equity....................... 24,530,732 26,856,896
------------ ------------
$107,944,158 $103,613,338
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 16
<TABLE>
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Premiums....................................... $223,679,071 $208,730,840 $172,010,014
Net investment income (Note 2)................. 6,515,927 5,367,184 4,606,036
Net gain (loss) on sales/calls of investments
(Note 2).................................... (23,024) 707,741 514,679
Other income................................... 29,237 5,662 1,697
------------ ------------ ------------
$230,201,211 214,811,427 177,132,426
------------ ------------ ------------
Benefits, losses and expenses:
Benefits, claims, losses and settlement
expenses.................................... 155,257,560 146,017,738 114,394,481
Commissions.................................... 33,573,278 32,120,808 26,777,138
Salaries and benefits.......................... 14,387,949 14,025,177 12,827,295
Taxes, licenses and fees....................... 5,296,613 5,168,061 4,359,665
Other operating expenses....................... 13,983,649 13,538,631 14,431,625
Interest expense............................... 829,173 836,473 852,586
------------ ------------ ------------
223,328,222 211,706,888 173,642,790
------------ ------------ ------------
Income before Federal income taxes............... 6,872,989 3,104,539 3,489,636
Federal income tax expense (benefit) (Note 5).... 2,059,228 714,190 (34,581)
------------ ------------ ------------
Net income (Note 4).............................. $ 4,813,761 $ 2,390,349 $ 3,524,217
=========== =========== ===========
Net income per share (Note 1).................... $ 1.14 $ .57 $ .85
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 17
<TABLE>
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
NET UN-
REALIZED
ADDITIONAL GAIN
COMMON PAID-IN (LOSS) ON RETAINED
SHARES CAPITAL INVESTMENTS EARNINGS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1991................... $ 1,984,601 $ 3,260,873 $ -- $18,553,097
Cash dividends ($.36 per share)............ -- -- -- (1,436,319)
Net income................................. -- -- -- 3,524,217
Exercise of stock options (Note 10)........ 19,500 109,032 -- --
----------- ----------- ----------- -----------
Balance, December 31, 1992................... 2,004,101 3,369,905 -- 20,640,995
Cash dividends ($.40 per share)............ -- -- -- (1,609,043)
Net income................................. -- -- -- 2,390,349
Exercise of stock options (Note 10)........ 8,090 52,499 -- --
----------- ----------- ----------- -----------
Balance, December 31, 1993................... 2,012,191 3,422,404 -- 21,422,301
Cash dividends ($.44 per share)............ -- -- -- (1,772,615)
Net income................................. -- -- -- 4,813,761
Exercise of stock options (Note 10)........ 6,459 53,286 -- --
Adjustment for change in accounting for
fixed maturities at January 1, 1994, net
of deferred tax of $601,224............. -- -- 1,167,080 --
Change in net unrealized holding loss, net
of deferred tax benefit of $601,224..... -- -- (6,594,135) --
----------- ----------- ----------- -----------
Balance, December 31, 1994................... $ 2,018,650 $ 3,475,690 $(5,427,055) $24,463,447
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 18
<TABLE>
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 4,813,761 $ 2,390,349 $ 3,524,217
Adjustments to reconcile net income to cash
provided by operating activities before
extraordinary item:
Depreciation and amortization............. 974,410 1,168,324 1,116,087
Realized (gain) loss on sale of fixed
maturities............................. 23,024 (707,741) (514,679)
Changes in assets and liabilities:
Premiums receivable.................... 253,071 715,915 (1,431,585)
Federal income taxes recoverable....... 100,044 769,883 (1,115,333)
Investment income...................... (306,827) (478,481) 69,817
Deferred federal income taxes.......... 524,411 (55,693) (692,970)
Other assets........................... (68,187) 646,701 (84,630)
Future policy benefits, claims and
funds payable........................ 3,421,129 7,519,405 9,372,290
Other liabilities...................... 385,691 631,010 1,167,513
----------- ----------- -----------
Net cash provided by operating
activities........................... 10,120,527 12,599,672 11,410,727
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to furniture and equipment........... (461,773) (361,576) (1,044,759)
Net proceeds (purchase) of investments --
short-term.................................. 4,249,097 (500,009) (5,000,000)
Purchase of investments -- fixed maturities
held to maturity............................ (1,354,688) -- --
Purchase of investments -- fixed maturities
available for sale.......................... (28,293,915) -- --
Purchase of investments........................ -- (40,866,696) (22,805,753)
Policy loans................................... (9,168) (2,648) 15,191
Proceeds from sale, call or maturity of fixed
maturities available for sale............... 12,746,906 5,693,954 1,661,825
Proceeds from calls/maturity of fixed
maturities held to maturity................. 3,451,020 16,918,316 12,065,235
----------- ----------- -----------
Net cash used in investing
activities........................... (9,672,521) (19,118,659) (15,108,261)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in annuity contract liabilities... 2,929,025 8,993,293 3,089,270
Principal payments on long-term debt........... (78,861) (71,741) (67,666)
Proceeds from exercise of stock options........ 59,745 60,589 128,532
Dividends...................................... (1,772,615) (1,609,043) (1,436,319)
----------- ----------- -----------
Net cash provided by financing
activities........................... 1,137,294 7,373,098 1,713,817
----------- ----------- -----------
Net increase (decrease) in cash........ 1,585,300 854,111 (1,983,717)
Cash at beginning of year........................ 6,069,187 5,215,076 7,198,793
----------- ----------- -----------
Cash at end of year.............................. $ 7,654,487 $ 6,069,187 $ 5,215,076
========== ========== ==========
Supplemental disclosures of cash flow
information:
Cash paid during the year for interest......... $ 829,173 $ 836,473 $ 852,586
Cash paid during the year for income taxes..... $ 1,434,773 $ -- $ 1,908,389
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 19
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1993 AND 1992
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1 -- SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company that materially
affect financial reporting are summarized below. The accompanying financial
statements have been prepared in accordance with generally accepted accounting
principles (GAAP) which differ from statutory accounting practices prescribed or
permitted by regulatory authorities.
(A) CONSOLIDATION POLICY
The consolidated financial statements include the accounts of Central
Reserve Life Corporation (Company) and its wholly-owned subsidiaries, Central
Reserve Life Insurance Company (Central), Western Reserve Administrative
Services, Inc. (Western) and CRL Asset Management Corporation (AMC). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
(B) DESCRIPTION OF BUSINESS
Central is a life and accident and health insurer licensed in 35 states.
Central principally sells group insurance, however, it offers a full range of
life, health, and annuity products through general agents and independent
writing agents and is subject to competition from other insurers throughout the
United States. Central is subject to regulation by the insurance department of
states in which it is licensed, and undergoes periodic examinations by those
departments.
The following is a description of certain risks facing life and accident
and health insurers and how Central mitigates those risks:
Legal/Regulatory Risk is the risk that, changes in the legal or
regulatory environment in which an insurer operates, will create additional
expenses not anticipated by the insurer in pricing its products. That is,
regulatory initiatives designed to reduce insurer profits or otherwise
affecting the industry in which the insurer operates, new legal theories or
insurance company insolvencies through guaranty fund assessments, may
create costs for the insurer beyond those recorded in the financial
statements. Central attempts to mitigate this risk by offering a wide range
of products and by operating in 35 states, thus reducing its exposure to
any single product or non-Federal jurisdiction, and also by employing
underwriting practices which identify and minimize the adverse impact of
this risk.
It now appears that no major federal health care reform will take
place in 1995. However, incremental changes are more probable than major
changes and it is more likely this will be on the state level than federal.
The federal government has already enacted a series of health care mandates
which has resulted in cost shifting from the federal government to state
government and the private sector. The Company cannot predict the ultimate
timing or effect of such legislative efforts, and no assurance can be given
that any such efforts will not have a material adverse effect on the
Company's business and results of operations.
Credit Risk is the risk that issuers of securities owned by Central
will default or that other parties, including reinsurers that have
obligations to Central, will not pay or perform. Central attempts to
minimize this risk by adhering to a conservative investment strategy and by
maintaining sound reinsurance and credit and collection policies.
Interest Rate Risk is the risk that interest rates will change and
cause a decrease in the value of an insurer's investments. This change in
rates may cause certain interest-sensitive products to become uncompetitive
or may cause disintermediation. Central attempts to mitigate this risk by
charging fees for non-conformance with certain policy provisions and/or by
attempting to match the maturity schedule of
18
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1993 AND 1992
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
its assets with the expected payouts of its liabilities. To the extent that
liabilities come due more quickly than assets mature, an insurer would have
to sell assets prior to maturity and recognize a gain or loss.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements and revenues and expenses
for the period. Actual results could differ significantly from those estimates.
The estimates susceptible to significant change are those used in
determining the liability for future policy benefits, losses and claims.
Although some variability is inherent in these estimates, management believes
the amounts provided are adequate.
(C) INVESTMENTS
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 (SFAS 115) "Accounting for Certain Investments in
Debt and Equity Securities". SFAS 115 requires that investments in all debt
securities and those equity securities with readily determinable market values
be classified into one of three categories: held to maturity, trading or
available for sale. Classification of investments is based upon management's
current intent. Debt securities which management has a positive intent and
ability to hold until maturity are classified as securities held to maturity and
are carried at amortized cost. Unrealized holding gains and losses on securities
held to maturity are not reflected in the consolidated financial statements.
Debt and equity securities that are purchased for short-term resale are
classified as trading securities. Trading securities are carried at market
value, with unrealized holding gains and losses included in earnings. All other
debt and equity securities not included in the above two categories are
classified as securities available for sale. Securities available for sale are
carried at market value, with unrealized holding gains and losses reported as a
separate component of shareholders' equity, net of tax. At December 31, 1994 the
Company did not have any investments classified as trading securities.
Prior to January 1, 1994, the Company classified fixed maturities in
accordance with the then existing accounting standards, and, accordingly, those
fixed maturities intended to be held to maturity were reported at amortized cost
and those considered available for sale were reported at the lower of aggregate
amortized cost or market.
(D) DEFERRED POLICY ACQUISITION COSTS
Certain costs, principally commissions, which vary with and are directly
related to the production of ordinary life business, have been deferred. The
deferred costs are being amortized through the use of factors over the benefit
period of the related policies. These factors were developed using assumptions
which are consistent with those used in setting rates. Due to the nature of the
business and its persistency experience, the Company does not defer acquisition
costs for Central's group business. Deferred policy acquisition costs at
December 31, 1994 and 1993 were $149,926 and $89,810, respectively. The net
amounts amortized to income were $60,116 in 1994, $16,849 in 1993 and $787 in
1992.
(E) PROPERTY AND EQUIPMENT
Included in the $12 million for property and equipment is approximately
$10.3 million (net of depreciation) for the home office, of which $1.4 million
is for land. Depreciation for the building is primarily over 31.5 years, except
for certain components which will be over 15 years. The straight-line method is
used.
Other property and equipment, primarily furniture, fixtures and data
processing equipment, is carried at cost less allowances for depreciation and
amortization. Depreciation is computed on the straight-line method over the
estimated useful lives of the equipment, principally five and seven years.
19
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1993 AND 1992
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(F) POLICY RESERVES
Liabilities for future policy benefits on ordinary life insurance have
generally been provided on a net-level premium method based upon estimates of
future investment yield, mortality and withdrawals using Central's experience
and actuarial judgement with an allowance for possible unfavorable deviation
from the expected experience. The Company amortizes deferred costs of all
ordinary life policies for Central over the benefit period. The liability for
future policy benefit reserves has been computed using the following
assumptions:
(1) The guaranteed interest rate on policies currently being issued is
5.2%.
(2) Estimates of future mortality and withdrawals are based on experience
and established industry tables.
(G) LIFE AND ACCIDENT AND HEALTH CLAIM RESERVES
The liabilities for unpaid accident and health and death claims are
estimated principally based upon past experience for pending, incurred but not
reported and reopened claims. The liability includes a provision for the
estimated cost of investigating and settling the claim liability. The liability
is particularly sensitive to recent claims frequency and severity experience of
Central. Management believes the liabilities for unpaid claims are adequate. A
consulting actuary is retained by Central to assist in the estimation process
and to certify to the statutory reserves.
(H) RECOGNITION OF PREMIUM REVENUES AND BENEFITS
Life premiums are recognized as revenues as they become due. Benefits and
expenses are reported in a manner which results in the recognition of profits
over the life of the policy. Such recognition is accomplished through the
provision of liabilities for future benefits over the life of the contract and
the amortization of acquisition costs over the benefit period.
Accident and health insurance premiums are recognized as revenue over the
terms, principally monthly, of the policies. Policy claims are charged to
expense in the period that the claims are incurred.
Contracts that do not subject Central to risks arising from policyholder
mortality or morbidity are referred to as investment contracts. Certain deferred
and flexible annuities are considered investment contracts. Amounts received as
payments for such contracts are accounted for as deposits and included in future
policy benefits, losses and claims.
(I) EARNINGS PER SHARE
Net income per share is computed using the weighted average number of
common shares outstanding. The number of shares was increased to reflect 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
4,201,069 in 1994, 4,182,384 in 1993 and 4,164,082 in 1992.
(J) FEDERAL INCOME TAXES
The Company follows Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes". Under the asset and liability method of SFAS
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
20
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1993 AND 1992
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(K) RECLASSIFICATIONS
For 1994 and 1993, the Company has reclassified certain claims related
expenses from "Other operating expenses" to "Benefits, claims, losses and
settlement expenses". Management believes this results in a more accurate
presentation.
<TABLE>
NOTE 2 -- CASH AND INVESTMENTS
The following is the breakdown of investment income by category of
investments for the years ending December 31:
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturities................... $5,931,835 $4,920,894 $4,016,926
Policy loans....................... 5,065 4,768 5,473
Short-term investments............. 553,140 440,147 448,035
Other.............................. 25,887 1,375 135,602
---------- ---------- ----------
$6,515,927 $5,367,184 $4,606,036
========= ========= =========
</TABLE>
<TABLE>
Realized gains and losses are summarized as follows:
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1993 1992
--------- ---------- ----------
<S> <C> <C> <C>
Realized gains:
Fixed maturities............................... $ 236,385 $ 754,980 $ 569,954
--------- ---------- ----------
Realized losses:
Fixed maturities............................... 127,601 47,239 55,275
Equipment...................................... 131,808 -- --
--------- ---------- ----------
Total losses........................... 259,409 47,239 55,275
--------- ---------- ----------
Net gains (losses) on sales/calls of
investments.................................... $ (23,024) $ 707,741 $ 514,679
======== ========= =========
</TABLE>
As discussed in note 1, Summary of Business and Significant Accounting
Policies, the Company adopted SFAS 115 as of January 1, 1994. In conjunction
with the adoption of SFAS 115, the Company has classified fixed maturities of
$13,468,956, at amortized cost, as held to maturity and fixed maturities of
$67,409,309, at fair value, as available for sale at December 31, 1994. In
accordance with SFAS 115, prior-year financial statements have not been restated
to reflect the change in accounting principle.
21
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1993 AND 1992
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
The amortized cost and fair value of securities held to maturity and
available for sale as of December 31, 1994 are as follows. The fair value is
based on quoted market prices, where available, or on values obtained from
independent pricing services.
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING
COST GAINS LOSSES FAIR VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury securities.......... $ 8,901,299 $ 53,311 $ (711,900) $ 8,242,710
Mortgage-backed securities:
Federal Home Loan
Mortgage..................... 2,899,219 -- (341,719) 2,557,500
Federal National Mortgage...... 1,354,688 -- (161,888) 1,192,800
Other.......................... 313,750 14,854 (1,929) 326,675
----------- ---------- ----------- -----------
Total held to maturity.... $13,468,956 $ 68,165 $(1,217,436) $12,319,685
========== ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING
COST GAINS LOSSES FAIR VALUE
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities.......... $ 9,215,421 $ 21,899 $ (305,973) $ 8,931,347
Obligations of states,
municipalities and political
subdivisions................... 1,250,018 4,697 (111,623) 1,143,092
Corporate bonds................... 25,598,088 19,889 (2,474,687) 23,143,290
Convertible bonds................. 2,008,831 50,121 (72,351) 1,986,601
Foreign........................... 503,133 -- (72,683) 430,450
Mortgage-backed securities:
Federal Home Loan
Mortgage..................... 13,382,043 6,862 (708,647) 12,680,258
Federal National Mortgage...... 9,812,126 -- (868,467) 8,943,659
Other.......................... 11,066,704 23,935 (940,027) 10,150,612
----------- ---------- ----------- -----------
Total available for
sale.................... $72,836,364 $127,403 $(5,554,458) $67,409,309
========== ========= ========== ==========
</TABLE>
22
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1993 AND 1992
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
The amortized cost and estimated market value as of December 31, 1993 of
fixed maturities is as follows:
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1993
U.S. Treasury securities.............. $16,775,827 $ 643,343 $ (69,442) $17,349,728
Obligations of states, municipalities
and political subdivisions......... 1,974,551 97,556 -- 2,072,107
Corporate bonds....................... 17,639,758 296,558 (125,413) 17,810,903
Convertible bonds..................... 1,669,517 129,295 (7,287) 1,791,525
Redeemable preferred stocks........... 604,041 40,750 (23,209) 621,582
Mortgage-backed securities:
Federal Home Loan Mortgage......... 13,301,722 468,567 (3,779) 13,766,510
Federal National Mortgage.......... 8,347,759 261,818 (51,627) 8,557,950
Government National Mortgage....... 7,805,484 685,183 -- 8,490,667
Other.............................. 4,319,982 22,036 (826) 4,341,192
----------- ---------- ---------- -----------
$72,438,641 $2,645,106 $ (281,583) $74,802,164
========== ========= ========= ==========
</TABLE>
<TABLE>
The proceeds, gross realized gains and gross realized losses from the sale
(excluding calls, maturities and pay downs) of fixed maturities available for
sale during each year were as follows:
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Proceeds......................................... $1,820,867 $5,693,954 $1,661,825
Gross realized gains............................. 124,067 388,026 94,972
Gross realized losses............................ 87,428 23,375 21,907
========= ========= =========
</TABLE>
<TABLE>
The amortized cost and fair value of fixed maturities at December 31, 1994,
by contractual maturity, are as follows. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without penalties.
<CAPTION>
DECEMBER 31, 1994
---------------------------
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Held to maturity:
Due in one year or less............................... $ 1,301,203 $ 1,326,532
Due after one year through five years................. 5,047,608 4,696,245
Due after five years through ten years................ 2,552,488 2,219,933
----------- -----------
8,901,299 8,242,710
Mortgage-backed securities (6.5 average years)........ 4,567,657 4,076,975
----------- -----------
Total held to maturity........................ $13,468,956 $12,319,685
========== ==========
</TABLE>
23
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1993 AND 1992
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Available for sale:
Due in one year or less............................... $ 1,104,940 $ 1,113,223
Due after one year through five years................. 6,630,262 6,464,943
Due after five years through ten years................ 24,662,550 22,572,331
Due after ten years................................... 6,177,739 5,484,283
----------- -----------
38,575,491 35,634,780
Mortgage-backed securities (7.6 average years)........ 34,260,873 31,774,529
----------- -----------
Total available for sale...................... 72,836,364 67,409,309
========== ==========
</TABLE>
At December 31, 1994 cash includes approximately $3.1 million held for
self-funded accident and health accounts, which is restricted as to its use. A
corresponding amount is included in liabilities in the accompanying consolidated
financial statements.
At December 31, 1994 Central had certificates of deposit and fixed
maturities on deposit with various state insurance departments, carried at
$3,380,448, for the protection of policyholders.
At December 31, 1994, short term investments include a repurchase agreement
with a carrying value of $300,000. The repurchase agreement is collateralized by
U. S. Treasury Notes and Bonds with a market value in excess of $300,000.
NOTE 3 -- LIABILITY FOR OTHER POLICY CLAIMS AND BENEFITS PAYABLE
<TABLE>
The following table reflects the activity in the liability for Other Policy
Claims and Benefits Payable, including the claims adjustment expenses (CAE) as
follows:
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year........... $ 32,003,500 $ 25,288,000 $ 16,771,500
Incurred claims and CAE for:
Current year...................... 153,942,398 142,012,399 116,165,174
Prior years....................... (2,407,635) (212,850) (60,851)
------------ ------------ ------------
Total incurred............... 151,534,763 141,799,549 116,104,323
------------ ------------ ------------
Paid claims and CAE, net of
reinsurance, for:
Current year...................... 118,722,406 110,008,899 90,877,174
Prior years....................... 29,595,865 25,075,150 16,710,649
------------ ------------ ------------
Total paid................... 148,318,271 135,084,049 107,587,823
------------ ------------ ------------
Balance at end of year................. $ 35,219,992 $ 32,003,500 $ 25,288,000
=========== =========== ===========
</TABLE>
The favorable development is a result of the Company strengthening reserves
such as those stated above, over the last few years.
NOTE 4 -- DIVIDEND RESTRICTION AND STATUTORY FINANCIAL INFORMATION
At December 31, 1994, $25,098,580 of consolidated shareholders' equity
represents net assets of the Company's insurance subsidiary which is subject to
certain regulatory restrictions on paying dividends and making loans or advances
to the parent company. Generally, the net assets of the Company's insurance
24
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1993 AND 1992
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
subsidiary available for transfer to the parent company are limited to the
amounts by which the insurance subsidiary's net assets, as determined in
accordance with statutory accounting practices, exceed minimum statutory
requirements. In addition, payments of such amounts as dividends are subject to
approval by regulatory authorities when (i) any such dividend is proposed to be
paid from other than earned surplus (as defined in the applicable statute) or
(ii) the value of any such dividend, together with the value of other dividends
paid or distributions made within the preceding 12 months, exceeds the greater
of (a) ten percent of the insurer's surplus as regards policyholders as of the
31st day of December next preceding the dividend payment, or (b) the net income
of such insurer for the 12-month period ended the December 31st next preceding
the dividend payment.
<TABLE>
Shareholders' capital and surplus and net income as determined in
accordance with statutory accounting practices for Central differ from GAAP.
Following is a reconciliation showing those differences.
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Statutory capital and surplus of insurance
subsidiary................................. $25,098,580 $21,548,063 $20,111,640
Shareholders' equity of non-insurance
subsidiaries............................... 2,257,634 2,247,673 2,725,479
Add (deduct):
Net unrealized holding loss................ (5,427,055) -- --
Deferred policy acquisition costs.......... 149,926 89,810 16,849
Policyholder reserve adjustments........... (429,487) (503,102) 106,284
Asset valuation and interest maintenance
reserve................................. 1,129,787 1,062,554 536,010
Non-admitted assets and other adjustments,
net..................................... 816,065 952,205 1,114,739
Deferred federal income taxes.............. 935,282 1,459,693 1,404,000
----------- ----------- -----------
Shareholders' equity per
accompanying consolidated
financial statements............. $24,530,732 $26,856,896 $26,015,001
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Statutory net income of insurance
subsidiary................................. $ 4,989,122 $ 2,685,908 $ 2,297,674
Net income (loss) of non-insurance
subsidiaries............................... 222,831 (260,601) 224,037
Adjustments to restate to the basis of
generally accepted accounting principles:
Increases (decreases):
Policyholder reserves................. 73,615 (609,386) 20,957
Deferred federal income tax benefit... (524,411) 55,693 692,970
Deferred policy acquisition costs..... 60,116 72,961 (787)
Net change in interest maintenance
reserve............................ (7,512) 445,774 289,366
----------- ----------- -----------
Net income per accompanying
consolidated financial
statements....................... $ 4,813,761 $ 2,390,349 $ 3,524,217
========== ========== ==========
</TABLE>
Central's statutory accounting practices are all prescribed by the Ohio
Department of Insurance.
In December 1992, the National Association of Insurance Commissioners
(NAIC) adopted the Life Risk-Based Capital (RBC) formula. This model act
requires every life and health insurer to calculate its total adjusted capital
and RBC requirement, and provides for an insurance commissioner to intervene if
the insurer
25
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1993 AND 1992
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
experiences financial difficulty. The formula includes components for asset
risk, liability risk, interest rate exposure and other factors. The RBC
requirement is for statutory financial statements and was effective December 31,
1993. It is anticipated that the model act will be adopted in Ohio, Central's
state of domicile. Based upon the December 31, 1994 statutory financial
statements, Central exceeded all the required RBC levels.
NOTE 5 -- FEDERAL INCOME TAXES
The Company files a consolidated Federal income tax return with its
subsidiaries. The provision for Federal income tax does not bear the customary
relationship to pretax accounting income because of special tax provisions
available to life insurance companies. Central receives a benefit provided for
"small" life insurance companies.
Under the Life Insurance Company Income Tax Act of 1959, a portion of
insurance companies' net income, prior to 1984, is not subject to Federal income
taxes (within certain limitations) until it is distributed to stockholders, at
which time it is taxed at regular corporate rates. For Federal income tax
purposes, this untaxed income is accumulated in a memorandum account designated
"policyholders' surplus". The accumulated untaxed policyholders' surplus for
Central is $2,869,768.
<TABLE>
Federal income tax expense (benefit) is composed of the following:
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Current.................................. $1,534,817 $ 769,883 $ 658,389
Deferred................................. 524,411 (55,693) (692,970)
---------- ---------- ----------
$2,059,228 $ 714,190 $ (34,581)
========= ========= =========
</TABLE>
<TABLE>
Income tax expense attributable to income from operations differs from the
amounts computed by applying the U.S. federal income tax rate of 35% (34% for
1992). Those effects are as follows:
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense.......... $2,405,546 $1,086,589 $1,186,476
Special life insurance deduction......... (458,228) (590,004) (536,738)
Tax exempt interest...................... (21,589) (50,006) (87,731)
Change in the beginning-of-the-year
balance of the valuation allowance for
deferred tax assets allocated to income
tax expense............................ 397,127 12,000 (419,737)
Tax rate differential.................... (68,730) (31,046) --
Accrual adjustment....................... 25,636 237,812 (191,611)
IRS audit adjustment..................... 215,303 -- --
Alternative minimum tax.................. (300,060) 48,845 --
Other.................................... (135,777) -- 14,760
---------- ---------- ----------
$2,059,228 $ 714,190 $ (34,581)
========= ========= =========
</TABLE>
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
26
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1993 AND 1992
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
million of which $215,303, pertaining to some nondeductible 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.
<TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1994 and 1993 are presented below:
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Deferred tax assets:
Deferred acquisition costs.......................... $ 899,219 $1,161,638
Net unrealized holding loss......................... 1,845,199 --
Difference in reserves established for financial
statement purposes and those for income tax
purposes......................................... 884,145 933,345
Other............................................... 22,100 --
---------- ----------
Gross deferred tax assets...................... 3,650,663 2,094,983
Less valuation allowance....................... (2,347,326) (105,000)
---------- ----------
Net deferred assets......................... 1,303,337 1,989,983
---------- ----------
Deferred tax liabilities:
Bond discount accretion............................. 76,223 91,898
Difference in book and tax depreciation............. 150,940 297,500
Other............................................... 140,892 140,892
---------- ----------
Gross deferred tax liabilities................. 368,055 530,290
---------- ----------
Deferred tax asset............................. $ 935,282 $1,459,693
========= =========
</TABLE>
The Company establishes a valuation allowance based on its analysis
(scheduling) of future deductible amounts. A valuation allowance is currently
established to the extent future deductible amounts cannot offset future taxable
amounts or recover federal income taxes paid within the statutory carryback
period. Fluctuation in the valuation allowance is attributed to changes in the
effect of the small life insurance company deduction and to a 100% valuation
allowance on the net unrealized holding loss at December 31, 1994.
NOTE 6 -- MORTGAGE NOTE PAYABLE
<TABLE>
The Company executed a note payable, in December 1990, for $9,000,000
bearing interest at 9 1/2% per annum for 10 years. The Company received
$8,500,000 of the funds in December 1990 and the remaining $500,000 in December
1991. The mortgage note is collateralized by the home office building and by an
assignment of the tenant lease for the building. The Company has been required
to make monthly payments, since January 1991, based on a 30 year amortization
schedule, of $75,677 for 10 years. After five years, the
27
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1993 AND 1992
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Company has the right to prepay the loan with a 3% prepayment fee. Principal
payments due in the next five years, assuming no prepayments, are as follows:
<CAPTION>
YEAR AMOUNT
------------------------------ ----------
<S> <C>
1995.......................... $ 86,688
1996.......................... 95,291
1997.......................... 104,748
1998.......................... 115,145
1999.......................... 126,572
Thereafter.................... 8,157,310
----------
$8,685,754
=========
</TABLE>
NOTE 7 -- LEASES
Central leases furniture, fixtures and certain data processing equipment
under agreements classified as operating leases, which expire at various dates
through 1997.
<TABLE>
Charges for the leases were $854,358 in 1994, $533,329 in 1993 and $472,000
in 1992. Future net minimum payments under the above mentioned leases are as
follows:
<CAPTION>
DATA FURNITURE LASER
YEARS ENDING DECEMBER 31, PROCESSING FIXTURES PRINTING TOTAL
- ------------------------------ ---------- --------- -------- ----------
<S> <C> <C> <C> <C>
1995.......................... $ 541,634 $222,296 $141,876 $ 905,806
1996.......................... 393,508 -- 113,675 507,183
1997.......................... 184,912 -- -- 184,912
---------- --------- -------- ----------
$1,120,054 $222,296 $255,551 $1,597,901
========= ======== ======== =========
</TABLE>
NOTE 8 -- EMPLOYMENT CONTRACT
The Company's employment agreement with its Chief Executive Officer was
entered into in 1982 and amended in 1983. The agreement expires December 31,
2001 and calls for annual increases of 11% per year through 1996. The 1994
compensation under the agreement was $784,834. The agreement has a change of
control provision, which if exercised, upon such a change would require a lump
sum payment for the unexpired term.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, Central cedes reinsurance to other
insurers. These arrangements limit the maximum net policy benefit potential on
individual risks. Although the ceding of reinsurance does not discharge the
original insurer from its primary liability to its policyholders, the insurance
company that assumes the coverage also assumes the related liability.
The maximum amount of exposure that Central retains on any life is $50,000
on ordinary life and $25,000 on group life on ages through 70. No retention is
maintained over age 70. Maximum retention on impaired risks is $10,000. Central
also has reinsurance on group accident and health claims. Under a reinsurance
treaty in effect during 1994 Central is liable for incurred claims in any one
year for the deductible of $250,000 per person. In addition to the deductible,
Central will also retain claims from $250,000 to $500,000 up to a minimum
accumulation of $3,000,000, above which reinsurance payments are made to
Central. Each individual claim is also separately reinsured for 100% in excess
of $500,000. Effective January 1, 1995, Central's reinsurance treaty provides
that all individual claims in excess of $500,000 are 100% reinsured. The
28
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1993 AND 1992
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
overall effect of reinsurance is not material to the Company's financial
condition. Reinsurance treaties in effect at December 31, 1994 were with The
Cologne Life Reinsurance Company, Life ReAssurance Corporation of America and
Business Men's Assurance Company.
Central has a $1 million line of credit with a major bank, which was unused
as of December 31, 1994 and 1993.
The Company is involved in litigation and may become involved in potential
litigation arising in the ordinary course of business. In the opinion of
management, the effects, if any, of such litigation are not expected to be
material to the Company's consolidated financial condition.
NOTE 10 -- STOCK OPTIONS AND STOCK ISSUED
<TABLE>
Outstanding stock options consist of options granted by the Company at
prices equal to or above market price on the date of grant. On March 15, 1983,
an Incentive Stock Option Plan was adopted. The plan, which expired in May 1993,
provided that key full-time employees of the Company and its subsidiaries were
eligible for participation in the Plan. Also 300,000 options were granted to the
CEO in 1984, expiring in 1997, of which 255,000 remain outstanding at December
31, 1994. The following table summarizes data regarding all stock options:
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Number of shares subject to options:
Outstanding at beginning of year............. 355,670 299,150 347,850
Granted................................... -- 76,700 --
Expired/cancelled......................... (16,782) (4,000) (9,700)
Exercised................................. (12,918) (16,180) (39,000)
------------ ------------ ------------
Outstanding at end of year................... 325,970 355,670 299,150
=========== =========== ===========
Price range of options exercised............. $ 2.83-$6.75 $ 2.83-$6.75 $2.83-$4.625
Available for future grants.................. -- -- 76,700
</TABLE>
The exercise price of options outstanding at December 31, 1994, ranged from
$2.83 to $6.75 per share and those options expire in 1997 and 1998.
NOTE 11 -- PREFERRED SHARES
The Company has authorized 2,000,000 Non-Voting Preferred Shares, without
par value. The Company has never issued any Non-Voting Preferred Shares,
however, the Board of Directors is authorized at any time to provide for the
issuance of, such shares in one or more series, and to determine the
designations, preferences, limitations and other rights of the shares issued.
Holders of Non-Voting Preferred Shares shall have no voting rights except as
required by law. For each series, the Board of Directors shall determine, prior
to the issuance of any shares thereof, the designations, preferences,
limitations and relative or other rights thereof, including but not limited to
the dividend rate, liquidation price, redemption rights and price, sinking fund
requirements, conversion rights and restrictions on the issuance of such shares.
NOTE 12 -- PENSION PLAN
The Company adopted a noncontributory pension plan in 1978. The plan is a
defined contribution money purchase pension plan with an outside company,
covering substantially all full-time employees of age 20 1/2 or more who have
completed six months or more of service. Participants in the plan begin vesting
after two years of service and are fully vested after seven years. The
contribution was approximately $1,013,000 for 1994, $1,000,000 for 1993 and
$949,000 for 1992.
29
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DECEMBER 31, 1994, 1993 AND 1992
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 13 -- FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
<TABLE>
The following table presents the amounts of revenue and amounts of
operating profit or loss (on a GAAP basis) attributable to the Company's
(consolidated) industry segments. The Company is not required to allocate
investment assets or identifiable assets by industry segments.
<CAPTION>
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Premiums:
Group Life............................ $ 4,828,115 $ 4,988,762 $ 4,480,629
Group Accident and Health............. 217,731,794 202,850,443 167,045,729
Other................................. 1,119,162 891,635 483,656
------------ ------------ ------------
Total......................... $223,679,071 $208,730,840 $172,010,014
=========== =========== ===========
Investment Income:
Group Life............................ $ 13,576 $ 78,172 $ 106,052
Group Accident and Health............. 4,925,857 4,322,475 3,762,587
Annuities............................. 1,143,151 676,606 334,247
Other................................. 433,343 289,931 403,150
------------ ------------ ------------
Total......................... $ 6,515,927 $ 5,367,184 $ 4,606,036
=========== =========== ===========
Operating income (loss) before Federal
income tax:
Group Life............................ $ 1,201,115 $ 1,561,268 $ 119,621
Group Accident and Health............. 6,554,173 2,375,362 3,035,178
Annuities............................. (790,429) (1,234,413) (534,798)
Other................................. (91,870) 402,322 869,635
------------ ------------ ------------
$ 6,872,989 $ 3,104,539 $ 3,489,636
=========== =========== ===========
Annuity considerations not included in
premiums per SFAS 97.................. $ 3,492,402 $ 8,728,902 $ 3,152,029
=========== =========== ===========
</TABLE>
NOTE 14 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
The following is a summary of quarterly results of operations for the years
ended December 31, 1994 and 1993.
<CAPTION>
1ST 2ND 3RD 4TH
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1994
Revenues................................ $58,426,647 $56,678,300 $58,015,367 $57,080,897
Benefits and expenses................... 57,022,839 54,849,263 55,911,317 55,544,803
Net income.............................. 1,010,742 1,111,313 1,468,890 1,222,816
Earnings per share...................... .24 .26 .35 .29
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1993
Revenues................................ $50,452,326 $52,336,259 $55,060,539 $56,962,303
Benefits and expenses................... 51,345,666 52,652,843 52,498,261 55,210,118
Net income (loss)....................... (718,340) (251,584) 1,845,278 1,514,995
Earnings (loss) per share............... (.17) (.06) .44 .36
========== ========== ========== ==========
</TABLE>
30
<PAGE> 32
<TABLE>
SCHEDULE I
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1994
<CAPTION>
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
- ----------------------------------------------------------------------------------------------
AMOUNT ON
BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED MATURITIES -- HELD TO MATURITY
U.S. Treasury securities..................... $ 8,901,299 $ 8,242,710 $ 8,901,299
Mortgage-backed securities................... 4,567,657 4,076,975 4,567,657
FIXED MATURITIES -- AVAILABLE FOR SALE
U.S. Treasury securities..................... 9,215,421 8,931,347 8,931,347
Obligations of states, municipalities and
political subdivisions..................... 1,250,018 1,143,092 1,143,092
Corporate bonds.............................. 25,598,088 23,143,290 23,143,290
Convertible bonds............................ 2,008,831 1,986,601 1,986,601
Foreign...................................... 503,133 430,450 430,450
Mortgage-backed securities................... 34,260,873 31,774,529 31,774,529
----------- ----------- -----------
Total fixed maturities..................... 86,305,320 $79,728,994 80,878,265
----------- =========== -----------
Policy loans................................. 101,146 101,146
Short-term investments....................... 2,250,912 2,250,912
----------- -----------
Total investments.......................... $88,657,378 $83,230,323
========== ==========
</TABLE>
See accompanying independent auditors' report.
31
<PAGE> 33
<TABLE>
SCHEDULE III
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CENTRAL RESERVE LIFE CORPORATION (PARENT ONLY)
BALANCE SHEETS
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 31,
---------------------------
1994 1993
----------- -----------
<S> <C> <C>
ASSETS
Investments in subsidiaries*............................... $22,375,551 $24,652,035
Property and equipment..................................... 10,385,537 10,646,278
Cash....................................................... 261,544 113,729
Other...................................................... 217,684 231,761
----------- -----------
$33,240,316 $35,643,803
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable......................................... $ 23,830 $ 22,292
Mortgage note payable.................................... 8,685,754 8,764,615
----------- -----------
TOTAL LIABILITIES................................... 8,709,584 8,786,907
----------- -----------
Shareholders' equity:
Common stock............................................. 2,018,650 2,012,191
Paid-in capital.......................................... 3,475,690 3,422,404
Net unrealized holding loss.............................. (5,427,055) --
Retained earnings........................................ 24,463,447 21,422,301
----------- -----------
24,530,732 26,856,896
----------- -----------
$33,240,316 $35,643,803
========== ==========
<FN>
- ---------------
*Eliminated in consolidation
</TABLE>
See accompanying independent auditors' report.
32
<PAGE> 34
<TABLE>
SCHEDULE III
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CENTRAL RESERVE LIFE CORPORATION (PARENT ONLY)
STATEMENTS OF INCOME
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Dividend from subsidiaries*................ $1,500,000 $1,331,250 $1,500,000
Inter-company fees*........................ 1,434,000 1,170,000 1,245,000
Other investment income.................... 28,718 -- 86,026
---------- ---------- ----------
2,962,718 2,501,250 2,831,026
---------- ---------- ----------
Operating expenses........................... 1,290,738 1,433,853 1,373,124
Federal income tax expense (benefit)......... 8,790 -- (285,285)
---------- ---------- ----------
Income before equity in earnings of
subsidiaries............................... 1,663,190 1,067,397 1,743,187
Equity in earnings of subsidiaries
(net of dividends)......................... 3,150,571 1,322,952 1,781,030
---------- ---------- ----------
Net income.................... $4,813,761 $2,390,349 $3,524,217
========= ========= =========
<FN>
- ---------------
*Eliminated in consolidation.
</TABLE>
See accompanying independent auditors' report.
33
<PAGE> 35
<TABLE>
SCHEDULE III
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CENTRAL RESERVE LIFE CORPORATION (PARENT ONLY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income before equity in subsidiaries*.... $ 1,663,190 $ 1,067,397 $ 1,743,187
Change in accounts payable................. 1,538 3,184 (135,484)
Depreciation............................... 438,141 432,228 432,229
Change in other assets..................... 14,076 14,075 14,074
----------- ----------- -----------
Net cash provided by operating activities.... 2,116,945 1,516,884 2,054,006
----------- ----------- -----------
Cash Flows From Investing Activities:
Purchase of property and equipment......... (177,400) -- --
----------- ----------- -----------
Net cash used in investing activities........ (177,400) -- --
----------- ----------- -----------
Cash Flows From Financing Activities:
Dividends Paid............................. (1,772,615) (1,609,043) (1,436,319)
Decrease in notes payable*................. -- -- (735,000)
Issuance of common stock................... 59,745 60,589 128,532
Increase (decrease) in mortgage payable.... (78,860) (71,741) (67,666)
----------- ----------- -----------
Net cash used in financing activities........ (1,791,730) (1,620,195) (2,110,453)
----------- ----------- -----------
Net increase (decrease) in cash.............. 147,815 (103,311) (56,447)
Cash at beginning of year.................... 113,729 217,040 273,487
----------- ----------- -----------
Cash at end of year.......................... $ 261,544 $ 113,729 $ 217,040
========== ========== ==========
<FN>
- ---------------
*Eliminated in consolidation
</TABLE>
See accompanying independent auditors' report.
34
<PAGE> 36
<TABLE>
SCHEDULE V
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
- ------------------------------------------------------------------------------------------------------------------------------------
FUTURE OTHER BENEFITS
DEFERRED POLICY POLICY CLAIMS
POLICY BENEFITS, CLAIMS NET LOSSES &
ACQUISITION LOSSES & BENEFITS PREMIUM INVESTMENT SETTLEMENT
SEGMENT COST AND CLAIMS PAYABLE REVENUE INCOME EXPENSES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Group life................... $ -- $ 116,112 $ 236,500 $ 4,828,115 $ 13,576 $ 1,457,160
Group accident & health...... -- 6,511,021 34,837,000 217,731,794 4,925,857 151,715,281
Annuities.................... -- 18,883,495 -- -- 1,143,151 1,101,771
Other........................ 149,926 1,986,257 146,492 1,119,162 433,343 983,348
-------- ----------- ----------- ------------ ----------- ------------
Total.................. $149,926 $27,496,885 $35,219,992 $223,679,071 $ 6,515,927 $155,257,560
======== =========== =========== ============ =========== ============
Year ended December 31, 1993:
Group life................... $ -- $ 310,886 $ 217,000 $ 4,988,762 $ 78,172 $ 1,434,052
Group accident & health...... -- 5,937,733 31,750,000 202,850,443 4,322,475 143,272,984
Annuities.................... -- 15,954,470 -- -- 676,606 624,688
Other........................ 89,810 1,941,915 36,500 891,635 289,931 686,014
-------- ----------- ----------- ------------ ----------- ------------
Total.................. $ 89,810 $24,145,004 $32,003,500 $208,730,840 $ 5,367,184 $146,017,738
======== =========== =========== ============ =========== ============
Year ended December 31, 1992:
Group life................... $ -- $ 289,789 $ 352,000 $ 4,480,629 $ 106,052 $ 1,587,931
Group accident & health...... -- 4,622,691 24,905,000 167,045,729 3,762,587 112,270,407
Annuities.................... -- 6,961,177 -- -- 334,247 461,105
Other........................ 16,849 1,675,190 31,000 483,656 403,150 75,038
-------- ----------- ----------- ------------ ----------- ------------
Total.................. $ 16,849 $13,548,847 $25,288,000 $172,010,014 $ 4,606,036 $114,394,481
======== =========== =========== ============ =========== ============
<CAPTION>
- --------------------------------------------------------------
COLUMN A COLUMN H COLUMN I
- --------------------------------------------------------------
AMORTIZA-
TION OF
DEFERRED
ACQUISITION OPERATING
SEGMENT COSTS EXPENSES
- --------------------------------------------------------------
- --------------------------------------------------------------
<S> <C> <C>
Year ended December 31, 1994:
Group life................... $ -- $ 2,183,583
Group accident & health...... -- 64,449,683
Annuities.................... -- 798,322
Other........................ 60,116 578,958
------------ ------------
Total.................. $ 60,116 $68,010,546
============ ============
Year ended December 31, 1993:
Group life................... $ -- $ 2,072,187
Group accident & health...... -- 61,556,278
Annuities.................... -- 1,291,282
Other........................ 16,849 752,554
------------ ------------
Total.................. $ 16,849 $65,672,301
============ ============
Year ended December 31, 1992:
Group life................... $ -- $ 2,879,371
Group accident & health...... -- 55,511,338
Annuities.................... -- 471,464
Other........................ 787 385,349
------------ ------------
Total.................. $ 787 $59,247,522
============ ============
</TABLE>
See accompanying independent auditors' report.
35
<PAGE> 37
<TABLE>
SCHEDULE VI
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ----------------------------------------------------------------------------------------------------------------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Life insurance in force..... $1,012,860,000 $41,424,000 -- $ 971,436,000 --
============== =========== ========== ============== ===========
Premiums:
Life insurance............ $ 5,283,232 $ 65,498 -- $ 5,217,734 --
Accident & health
insurance............... 220,147,427 1,686,090 -- 218,461,337 --
-------------- ----------- ---------- -------------- -----------
$ 225,430,659 $ 1,751,588 -- $ 223,679,071 --
============== =========== ========== ============== ===========
Year ended December 31, 1993:
Life insurance in force..... $1,016,513,000 $13,608,000 -- $1,002,905,000 --
============== =========== ========== ============== ===========
Premiums:
Life insurance............ $ 5,391,994 $ 72,239 -- $ 5,319,755 --
Accident & health
insurance............... 204,338,846 882,491 -- 203,411,085 --
-------------- ----------- ---------- -------------- -----------
$ 209,730,840 $ 954,730 -- $ 208,730,840 --
============== =========== ========== ============== ===========
Year ended December 31, 1992:
Life insurance in force..... $ 913,891,000 $15,200,000 -- $ 898,691,000 --
============== =========== ========== ============== ===========
Premiums:
Life insurance............ $ 4,739,065 $ 46,836 -- $ 4,692,229 --
Accident & health
insurance............... 167,848,127 530,342 -- 167,317,785 --
-------------- ----------- ---------- -------------- -----------
$ 172,587,192 $ 577,178 -- $ 172,010,014 --
============== =========== ========== ============== ===========
</TABLE>
See accompanying independent auditors' report.
36
<PAGE> 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Greene & Wallace, Inc. were previously engaged as the principal accountants
to audit the registrant's financial statements. On October 1, 1992, that firm's
appointment as principal accountants was terminated and KPMG Peat Marwick LLP
was engaged as principal accountants to audit the registrant's financial
statements. The decision to change accountants was approved by the audit
committee of the board of directors and reported on Form 8-K, dated October 1,
1992.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated herein by
reference to the Company's Proxy Statement to Shareholders in connection with
its annual meeting of Shareholders to be held on May 18, 1995, as well as Part I
of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by
reference to the Company's Proxy Statement to Shareholders in connection with
its annual meeting of Shareholders to be held on May 18, 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated herein by
reference to the Company's Proxy Statement to Shareholders in connection with
its annual meeting of Shareholders to be held on May 18, 1995.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated herein by
reference to the Company's Proxy Statement to Shareholders in connection with
its annual meeting of Shareholders to be held on May 18, 1995.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.
(a) Filed documents. The following documents are filed as part of this
report:
1. Financial Statements.
Central Reserve Life Corporation and Subsidiaries: Audit Report.
Consolidated Balance Sheets -- December 31, 1994 and 1993.
Consolidated Statements of Income -- Years ended December 31, 1994, 1993
and 1992.
Consolidated Statements of Shareholders' Equity -- Years ended December
31, 1994, 1993 and 1992.
Consolidated Statements of Cash Flows -- Years ended December 31, 1994,
1993 and 1992.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules.
Central Reserve Life Corporation and Subsidiaries:
I. Summary of Investments -- Other than Investments in Related Parties.
III. Condensed Financial Information of Registrant.
37
<PAGE> 39
V. Supplementary Insurance Information.
VI. Reinsurance.
Other schedules are omitted because of the absence of conditions under
which they are required or because the required information is given in the
consolidated financial statements or notes thereto.
3. EXHIBITS:
* 3(a) -- Amended Articles of Incorporation
* 3(b) -- Code of Regulations
**10(a) -- Employment Contract
*10(b) -- Incentive Stock Option Plan
*10(c) -- Agreement of Lease
*10(d) -- Mortgage Note
*10(e) -- Mortgage
**16 -- Letter regarding change in certifying accountant.
*22 -- Subsidiaries
27 -- Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended December 31, 1994.
(c) Financial statements are on pages 14 to 18.
- ---------------
*Incorporated by reference from Registrant's Report on Form 10-K filed on March
12, 1992, file number 0-8483 and made a part hereof by such reference.
**Incorporated by reference from Registrant's Report on Form 10-K filed on March
25, 1993, file number 0-8483 and made a part hereof by such reference.
38
<PAGE> 40
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 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.
CENTRAL RESERVE LIFE CORPORATION
By: /s/ FRED LICK, JR.
------------------------------
Fred Lick, Jr., President
<TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY
AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<CAPTION>
DATE SIGNATURE AND CAPACITY
---- ---------------------
<S> <C>
February 23, 1995 By: /s/ FRED LICK, JR.
---------------------------------------------------
Fred Lick, Jr., Chairman of the Board of Directors
President, and Principal Executive Officer
February 23, 1995 By: /s/ FRANK W. GRIMONE
---------------------------------------------------
Frank W. Grimone, Executive Vice President,
Treasurer, and Principal Financial
and Accounting Officer
February 22, 1995 By: /s/ ROBERT E. BRUCE
---------------------------------------------------
Robert E. Bruce, Director
February 22, 1995 By: /s/ WILLIAM E. GERSTENSLAGER
---------------------------------------------------
William E. Gerstenslager, Director
February 22, 1995 By: /s/ E. LAWRENCE HENDERSHOT
---------------------------------------------------
E. Lawrence Hendershot, Director
February 22, 1995 By: /s/ JOHN L. MCKEAN
---------------------------------------------------
John L. McKean, Director
February 22, 1995 By: /s/ JOHN F. NOVATNEY, JR.
---------------------------------------------------
John F. Novatney, Jr., Director
February 22, 1995 By: /s/ DAVID L. ROSSIO
---------------------------------------------------
David L. Rossio, Director
February 22, 1995 By: /s/ THOMAS D. SCHULTE
---------------------------------------------------
Thomas D. Schulte, Director
February 22, 1995 By: /s/ ROBERT K. SMITH
---------------------------------------------------
Robert K. Smith, Director
February , 1995 By:
---------------------------------------------------
Attorney-in-Fact
</TABLE>
39
<PAGE> 41
<TABLE>
EXHIBIT INDEX
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT PAGES
- --------------- ---------------
<S> <C> <C>
3(a) Amended Articles of Incorporation.............................. *
3(b) Code of Regulations............................................ *
10(a) Employment Contract............................................ **
10(b) Incentive Stock Option Plan.................................... *
10(c) Agreement of Lease............................................. *
10(d) Mortgage Note.................................................. *
10(e) Mortgage....................................................... *
16 Letter regarding change in certifying accountant............... **
22 Subsidiaries................................................... *
27 Financial Data Schedule........................................
<FN>
- ---------------
*Incorporated by reference from Registrant's Report on Form 10-K filed on March
12, 1992, file number 0-8483 and made a part hereof by such reference.
**Incorporated by reference from Registrant's Report on Form 10-K filed on March
25, 1993, file number 0-8483 and made a part hereof by such reference.
</TABLE>
40
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENT OF CENTRAL RESERVE LIFE CORPORATION AND
SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, 1994.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 67,409,309
<DEBT-CARRYING-VALUE> 13,468,956
<DEBT-MARKET-VALUE> 12,319,685
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 83,230,323
<CASH> 7,654,487
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 107,944,158
<POLICY-LOSSES> 27,496,885
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 35,219,992
<POLICY-HOLDER-FUNDS> 5,751,966
<NOTES-PAYABLE> 8,685,754
<COMMON> 2,018,650
0
0
<OTHER-SE> 22,512,082
<TOTAL-LIABILITY-AND-EQUITY> 107,944,158
223,679,071
<INVESTMENT-INCOME> 6,515,927
<INVESTMENT-GAINS> (23,024)
<OTHER-INCOME> 29,236
<BENEFITS> 155,257,560
<UNDERWRITING-AMORTIZATION> 60,116
<UNDERWRITING-OTHER> 68,010,546
<INCOME-PRETAX> 6,872,989
<INCOME-TAX> 2,059,228
<INCOME-CONTINUING> 4,813,761
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,813,761
<EPS-PRIMARY> 1.14
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