<PAGE> 1
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission file number 0-8483
CENTRAL RESERVE LIFE CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-1017531
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17800 Royalton Road, Strongsville, Ohio 44136
-----------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 572-2400
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of the registrant's Common stock at September
30, 1996 was 4,047,530.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
A. Consolidated Condensed Balance Sheets
B. Consolidated Condensed Statements of Income
C. Consolidated Condensed Statements of Cash Flows
D. Notes to Consolidated Condensed Financial Statements
- 2 -
<PAGE> 3
<TABLE>
CENTRAL RESERVE LIFE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<CAPTION>
September 30 December 31
1996 1995
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities held to maturity, at amortized cost $ 11,892,373 $ 11,995,728
Fixed maturities available for sale, at fair value 70,815,142 69,831,327
------------- ------------
Total fixed maturities 82,707,515 81,827,055
Policy loans 107,356 106,441
Short-term investments, at cost which approximate market 7,321,276 9,377,285
------------- ------------
Total investments 90,136,147 91,310,781
Cash 4,291,243 9,102,020
Accrued investment income 1,213,818 973,380
Premiums receivable 3,152,135 1,853,105
Property and equipment, at cost 11,301,099 11,635,993
Deferred federal income taxes 911,690 512,350
Federal income taxes recoverable 2,395,232 326,380
Other assets 1,942,772 1,615,030
------------- ------------
$ 115,344,136 $117,329,039
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits, losses and claims $ 33,006,936 $ 30,192,055
Other policy claims and benefits payable 39,628,667 35,125,467
Other policyholders' funds 6,984,038 5,222,968
Other liabilities 5,003,822 4,888,502
------------- ------------
84,623,463 75,428,992
Mortgage note payable 8,528,451 8,599,067
------------- ------------
Total liabilities 93,151,914 84,028,059
------------- ------------
Commitments and contingencies
Shareholders' equity:
Non-Voting Preferred shares, no par value -- --
Common shares, no par value, stated value $.50 2,023,765 2,018,750
Additional paid-in capital 3,500,458 3,476,940
Net unrealized holding gain (loss) (1,050,950) 775,188
Retained earnings 17,718,949 27,030,102
------------- ------------
Total shareholders' equity 22,192,222 33,300,980
------------- ------------
$ 115,344,136 $117,329,039
============= ============
</TABLE>
- 3 -
<PAGE> 4
<TABLE>
CENTRAL RESERVE LIFE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
September 30 September 30 September 30 September 30
1996 1995 1996 1995
--------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 66,048,280 $ 58,400,268 $ 192,556,133 $173,332,633
Net investment income 1,768,634 1,708,679 5,047,803 4,822,893
Net realized investment gains (losses) (71) 68,016 7,335 143,287
Other income -- -- -- 12,420
------------- ------------ ------------ ------------
67,816,843 60,176,963 197,611,271 178,311,233
------------- ------------ ------------ ------------
BENEFITS, LOSSES AND EXPENSES
Benefits, claims, losses and settlement expenses 51,667,307 41,101,257 153,348,945 121,421,753
Commissions 9,167,096 8,353,716 26,490,392 25,027,884
Other operating expenses 9,170,152 8,637,620 27,574,710 26,312,359
------------- ------------ ------------ ------------
70,004,555 58,092,593 207,414,047 172,761,996
------------- ------------ ------------ ------------
Income (loss) before federal income taxes (2,187,712) 2,084,370 (9,802,776) 5,549,237
Federal income tax expense (benefit) (522,373) 812,000 (2,068,852) 1,886,000
------------- ------------ ------------ ------------
Net Income (loss) $ (1,665,339) $ 1,272,370 $ (7,733,924) $ 3,663,237
============= ============ ============= ============
Weighted average shares outstanding 4,214,629 4,229,074 4,221,694 4,216,765
------------- ------------ ------------ ------------
Net income (loss) per share $ (.40) $ .30 $ (1.83) $ .87
============= ============ ============ ============
</TABLE>
- 4 -
<PAGE> 5
<TABLE>
CENTRAL RESERVE LIFE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
NINE MONTHS ENDED
September 30
1996 1995
------------ ------------
<S> <C> <C>
INSURANCE COMPANY ACTIVITIES
Cash provided by (used by) operating activities $ (8,178,950) $ 5,958,973
Purchases of investments (9,890,254) (19,285,282)
Sales or maturities of investments 15,230,640 14,616,827
Purchase of property and equipment (167,055) (418,410)
Dividends paid (1,500,000) (1,425,000)
------------ ------------
Decrease in cash from insurance activities (4,505,619) (552,892)
------------ ------------
NON-INSURANCE ACTIVITIES
Dividends from subsidiaries 1,500,000 1,425,000
Dividends paid to shareholders (1,577,229) (1,453,452)
Other, net (227,929) 21,935
------------ ------------
Decrease from non-insurance activities (305,158) (6,517)
------------ ------------
Cash at beginning of period 9,102,020 7,654,487
------------ ------------
Cash at end of period $ 4,291,243 $ 7,095,078
============ ============
</TABLE>
- 5 -
<PAGE> 6
CENTRAL RESERVE LIFE CORPORATION
AND SUBSIDIARIES
D. Notes to Consolidated Condensed Financial Statements
----------------------------------------------------
1. These consolidated condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995,
as certain information and footnote disclosures required to be included
with financial statements prepared in accordance with generally accepted
accounting principles have either been condensed or omitted.
2. The consolidated condensed balance sheets at September 30, 1996 and the
consolidated condensed statements of income and cash flows for the nine
months ended September 30, 1996 and 1995 were prepared without audit. In
the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial
position as of September 30, 1996 and the results of operations for the
nine months then ended and cash flows for the nine months then ended.
3. The Federal income tax returns for the Company and its subsidiaries have
been examined by the Internal Revenue Service (IRS) for 1991 and 1992.
During the third quarter of 1994, the IRS issued a proposal for adjustments
to the Company's returns for 1991 and 1992. The proposed deficiencies are
approximately $2.4 million of which $215,303, pertaining to some non
deductible expenses and certain assets expensed and not capitalized, was
agreed to and paid in 1994. The balance primarily deals with whether or not
the Company's subsidiary, Central Reserve Life Insurance Company (Central),
qualified as a life company, for tax purposes. The Company is vigorously
protesting the proposed deficiency and management believes existing law
supports the Company's position. Therefore, the Company has not recorded a
liability for the difference.
If the IRS were to pursue litigation and prevail in its position that
Central no longer qualifies as a life company for tax purposes, Federal
income taxes would increase in the future. Presently, as a small life
company, Central is permitted, among other things, a deduction from the
first $3 million of income of 60% or $1.8 million. As Central's income
increases above $3 million, the special deduction is reduced
proportionately. Besides relying on favorable existing case law, Central
may have, under certain circumstances, the ability to change and market
policies that could insure its qualification as a life company for tax
purposes in the future, if the need arises.
4. The results of operations for the nine months ended September 30, 1996 are
not necessarily indicative of the results for the full year.
- 6 -
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES: The assets of the Company and its major
subsidiary, Central Reserve Life Insurance Company (Central), decreased
approximately 2% for the period ended September 30, 1996. The decrease was
mainly due to an increase in claim payments during the period. Central primarily
invests in bonds which amounts to about 72% of the total assets. Central does
not have any so-called "junk" bonds or what is considered high yield type
securities and 99% of the bonds are of investment grade quality. Current assets
and short term investments (not including government bonds of over $18 million
which have a ready market) amounted to about 14% of total assets. In accordance
with SFAS 115 the Company recorded net unrealized losses of $1,050,950 at
September 30, 1996, to reflect the reporting of certain investments at fair
value which was lower than amortized cost. This compares to net unrealized gains
of $1,174,528 at December 31, 1995. The difference between the fair value and
the amortized cost is reflected in shareholders' equity.
Reserves and accruals for future claim payments increased approximately 11%
from $65,317,522 at December 31, 1995 to $72,635,603 at September 30, 1996.
Shareholders' equity decreased to $22,192,222 at September 30, 1996 or
$11,108,758 including dividend payments and a $1,826,138 net decrease due to the
SFAS 115 adjustment.
RESULTS OF OPERATIONS: During the quarter ending September 30, 1996,
premiums increased 13% to $66,048,280 compared to $58,400,268 or 4% for the same
quarter in 1995. For the nine month period ending September 30, 1996, premiums
increased 11% to $192,556,133 compared to $173,332,633 or 3% for the same nine
month period in 1995. The increase, is again, in the group division, which
accounts for approximately 99% of the premiums. Certificates in force, as of
September 30, 1996, were 119,452. This represents a net increase of 5,732 or 5%
compared to a net increase of 7,768 or 9% for the same nine month period in
1995. New certificates issued during the nine month period ending September 30,
1996, were 30,567 compared to 34,175 for the same period in 1995. Lapses were
down to 24,835 for the nine month period ending September 30, 1996 compared to
26,407 in 1995.
Net investment income increased 3% for the quarter ending September 30,
1996 compared to a 9% increase for the same quarter in 1995. For the nine month
period ending September 30, 1996 net investment income increased to $5,047,803
or 5% compared to $4,822,893 in 1995, which was a 1% increase for the same
period.
The main reason for the lower increase in 1995 was due to a shift to
short-term investments and lower interest rates. In 1996 interest rates
increased slightly.
Policy benefits, claims, losses and settlement expenses increased to
$51,667,307 or 26% for the quarter ending September 30, 1996, compared to
$41,101,257 or a 5% increase for the same period in 1995. The loss ratio for the
quarter ending September 30, 1996 was 78.2% compared to 70.4% for the same
quarter in 1995. Although the ratio is higher in 1996 it did decrease 4%
- 7 -
<PAGE> 8
from the first quarter of 1996, which was 81.6%, and 1% from the second quarter,
which was 79.2%. For the nine month period ending September 30, 1996, benefits,
claims, losses and settlement expenses increased to $153,348,945 or 26% compared
to $121,421,753 or 3% for the same nine month period in 1995. The loss ratio for
the nine month period in 1996 was 79.6% compared to 70.1% for the same nine
month period in 1995. The increase in reserves for the nine months ending
September 30, 1996 was approximately $7 million. The increase in the claims loss
ratio in 1996 over 1995 continues to be the result of an underpriced product
sold heavily in 1995, the medical trend being much higher than planned, higher
than expected utilization of services and certain state mandates requiring
guaranteed issue and mandated benefits. Except for the underpriced product,
these items have had an effect on the whole industry and not just the Company.
The Company has implemented various monthly premium rate adjustments, which
became effective April 1, 1996. Due to the nature of the Company's business the
adjustments effect only about 8% of the business each month but produces a
cumulative effect throughout the year. The Company also strengthened its
underwriting procedures and is updating certain policy benefits pertaining to
utilization. The Company will continue to monitor rates and claims to determine
if any other adjustments are required.
Commissions were 13.9% of premiums for the quarter ending September 30,
1996 compared to 14.3% for the same quarter in 1995. For the nine month period
ending September 30, 1996 commissions were 13.8% of premiums compared to 14.4%
for the same nine month period in 1995. The decrease is due to the normal
commission decrease as first year business continues into the renewal years plus
a lower commission rate for a new product introduced in 1995, which continues to
be a strong seller in 1996.
Other operating expenses increased 6% to $9,170,152 for the quarter ending
September 30, 1996 compared to $8,637,620 for the same quarter in 1995. The
increase in the third quarter of 1996 was primarily due to printing and
advertising costs related to new policies, training tapes and brochures. For the
nine month period ending September 30, 1996 other operating expenses increased
5% to $27,574,710 compared to $26,312,359 or 6% for the same period in 1995. For
1996 the ratio to premiums was 14.3% compared to 15.2% in 1995.
The Company incurred losses of $1,665,339 ($.40 per share) for the quarter
and $7,733,924 ($1.83 per share) for the nine months ending September 30, 1996.
This compares to profits of $1,272,370 ($.30 per share) for the quarter and
$3,663,237 ($.87 per share) for the nine months ending September 30, 1995. As
indicated, the primary reason for the losses in 1996 was the large increase in
claims.
The book value per share at September 30, 1996 was $5.48 ($5.74 before
unrealized losses) compared to $8.25 ($8.06 before unrealized gains) at December
31, 1995.
Federal income taxes would increase in the future if the IRS, as indicated
in note 3 to the consolidated condensed financial statements, were to pursue
litigation and prevail in their position that Central no longer qualifies as a
life company for tax purposes. Presently, as a small life company, Central is
permitted, among other things, a deduction from the first
- 8 -
<PAGE> 9
$3,000,000 of income of 60% or $1,800,000, which is decreased by 15% for amounts
over $3,000,000. As Central's income increases the effect is lowered. Management
is relying on existing case law applied favorably to another taxpayer to resolve
this issue. Also, Central may have, under certain circumstances, the ability to
change and market policies that could insure it's qualification as a life
company for tax purposes in the future, if the need arises.
IMPACT OF INFLATION: Inflation rates impact the financial statements and
operating results in several areas. Changes in inflation rates impact the market
value of the investment portfolio and yields on new investments.
Inflation has had an impact on claim costs and overall operating costs and
although the medical inflation rate has been flat in the last few years, medical
inflation, overall, continues to increase and hospital and medical costs have
still increased at a higher rate than general inflation. While to a certain
extent these increased costs are offset by interest rates (investment income),
hospital charges increased, more than interest rates did. The Company will
continue to increase premium rates in accordance with trends in hospital and
medical costs along with concentrating on various cost containment programs.
- 9 -
<PAGE> 10
PART II - OTHER INFORMATION
---------------------------
All items of Part II other than Item 6 are either inapplicable to
Registrant or would not require a response.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
a) Exhibits.
Exhibit 11 - Statement Regarding Computation of Per Share
Earnings.
Exhibit 27 - Financial Data Schedule.
b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
- 10 -
<PAGE> 11
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTRAL RESERVE LIFE CORPORATION
Date: November 8, 1996 By: Frank W. Grimone
----------------------- ---------------------------------------
Frank W. Grimone
Executive Vice President
Date: November 8, 1996 By: Frank W. Grimone
----------------------- ---------------------------------------
Frank W. Grimone
Principal Financial Officer and
Chief Accounting Officer
- 11 -
<PAGE> 1
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Net income per share is computed using the weighted average number of
common shares outstanding. These shares were increased by the number of shares
issuable on the exercise of options, reduced by the number of shares assumed to
have been purchased with the proceeds from the exercise of these common stock
equivalents. The number of shares used to calculate the earnings per share was
4,221,694 for the nine month period ending September 30, 1996 and 4,216,765 for
the nine month period ending September 30, 1995.
- 12 -
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 70,815,142
<DEBT-CARRYING-VALUE> 11,892,373
<DEBT-MARKET-VALUE> 11,592,570
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 90,136,147
<CASH> 4,291,243
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 299,737
<TOTAL-ASSETS> 115,344,136
<POLICY-LOSSES> 33,006,936
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 39,628,667
<POLICY-HOLDER-FUNDS> 6,984,038
<NOTES-PAYABLE> 8,528,451
<COMMON> 2,023,765
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 115,344,136
192,556,133
<INVESTMENT-INCOME> 5,047,803
<INVESTMENT-GAINS> 7,335
<OTHER-INCOME> 0
<BENEFITS> 153,348,945
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 54,065,102
<INCOME-PRETAX> (9,802,776)
<INCOME-TAX> (2,068,852)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,733,924)
<EPS-PRIMARY> (1.83)
<EPS-DILUTED> (1.83)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
