<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 MARCH 31, 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 March 31,
1996 was 4,037,500.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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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
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CENTRAL RESERVE LIFE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1996 1995
------------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Investments:
Fixed maturities held to maturity, at amortized cost $ 11,962,367 $ 11,995,728
Fixed maturities available for sale, at fair value 67,915,885 69,831,327
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Total fixed maturities 79,878,252 81,827,055
Policy loans 105,374 106,441
Short-term investments, at cost which approximate market 11,054,243 9,377,285
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Total investments 91,037,869 91,310,781
Cash 5,727,334 9,102,020
Accrued investment income 1,115,712 973,380
Premiums receivable 2,186,824 1,853,105
Property and equipment, at cost 11,445,529 11,635,993
Deferred federal income taxes 911,690 512,350
Federal income taxes recoverable 1,166,380 326,380
Other assets 1,003,246 1,615,030
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$ 114,594,584 $117,329,039
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits, losses and claims $ 31,449,025 $ 30,192,055
Other policy claims and benefits payable 36,068,111 35,125,467
Other policyholders' funds 6,423,882 5,222,968
Other liabilities 3,968,564 4,888,502
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77,909,582 75,428,992
Mortgage note payable 8,576,083 8,599,067
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Total liabilities 86,485,665 84,028,059
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Commitments and contingencies
Shareholders' equity:
Non-Voting Preferred shares, no par value -- --
Common shares, no par value, stated value $.50 2,018,750 2,018,750
Additional paid-in capital 3,476,940 3,476,940
Net unrealized holding gain (loss) (493,241) 775,188
Retained earnings 23,106,470 27,030,102
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Total shareholders' equity 28,108,919 33,300,980
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$ 114,594,584 $117,329,039
============= ============
</TABLE>
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<PAGE> 4
CENTRAL RESERVE LIFE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1996 1995
------------ -----------
REVENUES
<S> <C> <C>
Premiums $ 61,397,347 $57,037,911
Net investment income 1,689,206 1,627,628
Net realized investment gains 257 9,522
Other income -- 418
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63,086,810 58,675,479
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BENEFITS, LOSSES AND EXPENSES
Benefits, claims, losses and settlement expenses 50,125,564 40,573,563
Commissions 8,474,159 8,263,095
Other operating expenses 8,725,844 8,262,921
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67,325,567 57,099,579
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Income (loss) before federal income taxes (4,238,757) 1,575,900
Federal income tax expense (benefit) (840,000) 475,000
============ ===========
Net income (loss) $ (3,398,757) $ 1,100,900
============ ===========
Weighted average shares outstanding 4,235,151 4,212,993
============ ===========
Net income (loss) per share $ (0.80) $ 0.26
============ ===========
</TABLE>
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<PAGE> 5
CENTRAL RESERVE LIFE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1996 1995
----------- -----------
INSURANCE COMPANY ACTIVITIES
<S> <C> <C>
Cash provided by (used by) operating activities $(3,314,841) $ 3,408,051
Purchases of investments (3,298,155) (8,775,895)
Sales or maturities of investments 3,649,923 3,813,626
Purchase of property and equipment (79,450) (251,148)
Dividends paid (500,000) (475,000)
----------- -----------
Decrease in cash from insurance activities (3,542,523) (2,280,366)
----------- -----------
NON-INSURANCE ACTIVITIES
Dividends from subsidiaries 500,000 475,000
Dividends paid to shareholders (524,875) (484,476)
Other, net 192,712 209,526
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Increase from non-insurance activities 167,837 200,050
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Cash at beginning of period 9,102,020 7,654,487
=========== ===========
Cash at end of period $ 5,727,334 $ 5,574,171
=========== ===========
</TABLE>
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<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 March 31, 1996 and the
consolidated condensed statements of income and cash flows for the three
months ended March 31, 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 March 31, 1996 and the results of operations for the three months then
ended and cash flows for the three 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 three months ended March 31, 1996 are not
necessarily indicative of the results for the full year.
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<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 March 31, 1996. Central primarily invests
in bonds which amounts to about 70% 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 about $18 million which have a
ready market) amounted to about 18% of total assets. In accordance with SFAS 115
the Company recorded unrealized losses of $493,241 at March 31, 1996, to reflect
the reporting of certain investments at fair value which was lower than
amortized cost. This compares to 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 3%
from $65,317,522 at December 31, 1995 to $67,517,136 at March 31, 1996.
Shareholders' equity decreased to $28,108,919 at March 31, 1996 or $5,192,061
after dividend payments and a $1,268,429 net decrease due to the SFAS 115
adjustment.
RESULTS OF OPERATIONS: During the three months ending March 31, 1996,
premiums increased to $61,397,347 compared to $57,037,911 for the same period
last year. This represents an 8% increase in 1996 over 1995 as compared to a 1%
increase in 1995 over 1994. The increase, is again, in the group health
division, which accounts for approximately 99% of the premiums. Net certificates
in force for the three months ending March 31, 1996 increased 3,578 to 117,298
or 3%, compared to 3,272 or 3% for the same period in 1995. Lapses were 8,442 in
1996 down about 10% from 9,347 in 1995. New certificates issued during the first
quarter of 1996 were 12,020 compared to 12,619 for the same quarter in 1995.
Net investment income increased about 4% to $1,689,206 for the quarter
ending March 31, 1996 compared to $1,627,628 in 1995, which was a 3% increase.
Policy benefits, claims, losses and settlement expenses increased 24% to
$50,125,564 for the first quarter in 1996 compared to $40,573,563 or an increase
of 1.5% in 1995. The incurred loss ratio for the quarter was 81.6% in 1996
compared to 71.1% in 1995. The increase was primarily due to an unusually large
(22%) increase in number of claims processed, resulting from numerous auto
accident related claims and greater utilization. Many of these claims were
attributable to the harsh winter. Also several large claims relating to
premature births were incurred during the first quarter of 1996. The increase
also includes a charge of approximately $2 million for reserve strengthening in
1996 compared to a slight decrease in reserves for the same period in 1995. The
Company has implemented various premium rate adjustments effective April 1, 1996
and continues to monitor the rates and claims to determine if any other
adjustments are required.
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<PAGE> 8
Commissions were 13.8% of premiums for the quarter ending March 31, 1996,
as compared to 14.5% in the same quarter in 1995. The decrease is due to the
normal commission decrease as first year business goes into the renewal years,
plus a lower commission rate for a new product introduced in 1995, which was a
strong seller for the Company.
Other operating expenses increased 6% to $8,725,844 for the first quarter
of 1996 as compared to $8,262,921 or a 4% decrease in 1995. The main areas for
the increase were payroll, postage and printing expenses. In total the operating
expenses were 14.2% of premiums in 1996, down slightly from 14.5% in 1995.
The Company incurred a net loss of $3,398,757 ($.80 per share) for the
first quarter ending March 31, 1996. This compares to a net income of $1,100,900
($.26 per share) for the same quarter in 1995. As indicated, the primary reason
for the loss was the large increase in claims.
The book value per share at March 31, 1996 was $6.96 ($7.08 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 $3,000,000 of income
of 60% or $1,800,000, which is decreased by 15% for amounts over $3,000,000. As
Central's income increases the effect is lowered. Management is relying on
existing case law applied favorably to another taxpayer to resolve this issue.
Also, Central may have, under certain circumstances, the ability to change and
market policies that could insure it's qualification as a life company for tax
purposes in the future, if the need arises.
IMPACT OF INFLATION: Inflation rates impact the financial statements and
operating results in several areas. Changes in inflation rates impact the market
value of the investment portfolio and yields on new investments.
Inflation has had an impact on claim costs and overall operating costs and
although it has been lower in the last few years, hospital and medical costs
have still increased at a higher rate than general inflation. While to a certain
extent these increased costs are offset by interest rates (investment income),
hospital charges increased, more than interest rates did. The Company will
continue to increase premium rates in accordance with trends in hospital and
medical costs along with concentrating on various cost containment programs.
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<PAGE> 9
PART II - OTHER INFORMATION
---------------------------
All items of Part II other than Item 6 are either inapplicable to
Registrant or would not require a response.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
a) Exhibits.
Exhibit 11 - Statement Regarding Computation of Per Share
Earnings.
Exhibit 27 - Financial Data Schedule.
b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
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<PAGE> 10
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTRAL RESERVE LIFE CORPORATION
Date: May 13, 1996 By: Frank W. Grimone
------------------------------- ------------------------------
Frank W. Grimone
Executive Vice President
Date: May 13, 1996 By: Frank W. Grimone
------------------------------- ------------------------------
Frank W. Grimone
Principal Financial Officer and
Chief Accounting Officer
- 10 -
<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
4,235,151 for the three month period ending March 31, 1996 and 4,212,993 for the
three month period ending March 31, 1995.
- 11 -
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000215403
<NAME> CENTRAL RESERVE LIFE
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 67,915,885
<DEBT-CARRYING-VALUE> 11,962,367
<DEBT-MARKET-VALUE> 11,749,160
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 91,037,869
<CASH> 5,727,334
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 262,750
<TOTAL-ASSETS> 114,594,584
<POLICY-LOSSES> 31,449,025
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 36,068,111
<POLICY-HOLDER-FUNDS> 6,423,882
<NOTES-PAYABLE> 8,576,083
<COMMON> 2,018,750
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 28,108,919
61,397,347
<INVESTMENT-INCOME> 1,689,206
<INVESTMENT-GAINS> 257
<OTHER-INCOME> 0
<BENEFITS> 50,125,564
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 17,200,003
<INCOME-PRETAX> (4,238,757)
<INCOME-TAX> (840,000)
<INCOME-CONTINUING> (3,398,757)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,398,757)
<EPS-PRIMARY> (.80)
<EPS-DILUTED> (.80)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
