<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 JUNE 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 June 30,
1996 was 4,047,500.
<PAGE> 2
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
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<S> <C>
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
</TABLE>
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<PAGE> 3
CENTRAL RESERVE LIFE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1996 1995
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(UNAUDITED)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities held to maturity, at amortized cost $ 11,924,311 $ 11,995,728
Fixed maturities available for sale, at fair value 72,184,222 69,831,327
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Total fixed maturities 84,108,533 81,827,055
Policy loans 109,739 106,441
Short-term investments, at cost which approximate market 3,138,529 9,377,285
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Total investments 87,356,801 91,310,781
Cash 5,819,411 9,102,020
Accrued investment income 1,042,972 973,380
Premiums receivable 2,974,887 1,853,105
Property and equipment, at cost 11,455,965 11,635,993
Deferred federal income taxes 911,690 512,350
Federal income taxes recoverable 1,872,859 326,380
Other assets 1,245,494 1,615,030
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$ 112,680,079 $117,329,039
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits, losses and claims $ 32,362,670 $ 30,192,055
Other policy claims and benefits payable 37,528,022 35,125,467
Other policyholders' funds 5,845,667 5,222,968
Other liabilities 4,284,145 4,888,502
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80,020,504 75,428,992
Mortgage note payable 8,552,548 8,599,067
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Total liabilities 88,573,052 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 $.50 2,023,750 2,018,750
Additional paid-in capital 3,500,270 3,476,940
Net unrealized holding gain (loss) (1,327,460) 775,188
Retained earnings 19,910,467 27,030,102
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Total shareholders' equity 24,107,027 33,300,980
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$ 112,680,079 $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 SIX MONTHS ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
1996 1995 1996 1995
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 65,110,506 $ 57,894,454 $ 126,507,853 $114,932,365
Net investment income 1,589,963 1,486,586 3,279,169 3,114,214
Net realized investment gains 7,149 65,749 7,406 75,271
Other income -- 12,002 -- 12,420
------------ ------------ ------------- ------------
66,707,618 59,458,791 129,794,428 118,134,270
------------ ------------ ------------- ------------
BENEFITS, LOSSES AND EXPENSES
Benefits, claims, losses and settlement expenses 51,556,074 39,746,933 101,681,638 80,320,496
Commissions 8,849,137 8,411,073 17,323,296 16,674,168
Other operating expenses 9,678,714 9,411,818 18,404,558 17,674,739
------------ ------------ ------------- ------------
70,083,925 57,569,824 137,409,492 114,669,403
------------ ------------ ------------- ------------
Income (loss) before federal income taxes (3,376,307) 1,888,967 (7,615,064) 3,464,867
Federal income tax expense (benefit) (706,479) 599,000 (1,546,479) 1,074,000
------------ ------------ ------------- ------------
Net income (loss) $ (2,669,828) $ 1,289,967 $ (6,068,585) $ 2,390,867
============ ============ ============= ============
Weighted average shares outstanding 4,220,069 4,206,301 4,224,552 4,209,725
------------ ------------ ------------- ------------
Net income (loss) per share $ (.63) $ .31 $ (1.43) $ .57
============ ============ ============= ============
</TABLE>
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<PAGE> 5
CENTRAL RESERVE LIFE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
1996 1995
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<S> <C> <C>
INSURANCE COMPANY ACTIVITIES
Cash provided by (used by) operating activities $ (3,406,359) $ 4,039,055
Purchases of investments (9,890,254) (18,276,798)
Sales or maturities of investments 11,476,943 13,082,070
Purchase of property and equipment (167,055) (347,309)
Dividends paid (1,000,000) (950,000)
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Decrease in cash from insurance activities (2,986,725) (2,452,982)
------------ ------------
NON-INSURANCE ACTIVITIES
Dividends from subsidiaries 1,000,000 950,000
Dividends paid to shareholders (1,051,050) (968,964)
Other, net (244,834) 63,451
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Increase from non-insurance activities (295,884) 44,577
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Cash at beginning of period 9,102,020 7,654,487
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Cash at end of period $ 5,819,411 $ 5,246,082
============ ============
</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 June 30, 1996 and the
consolidated condensed statements of income and cash flows for the six
months ended June 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 June 30, 1996 and the results of operations for the six months then
ended and cash flows for the six 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 six months ended June 30, 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 4% for the period ended June 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 75% 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 $19 million which have a
ready market) amounted to about 12% of total assets. In accordance with SFAS 115
the Company recorded unrealized losses of $1,327,460 at June 30, 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 7%
from $65,317,522 at December 31, 1995 to $69,890,692 at June 30, 1996.
Shareholders' equity decreased to $24,107,027 at June 30, 1996 or $9,193,953
after dividend payments and a $2,102,648 net decrease due to the SFAS 115
adjustment.
RESULTS OF OPERATIONS: During the quarter ending June 30, 1996, premiums
increased 12% to $65,110,506 compared to $57,894,454 or 5% for the same quarter
in 1995. For the six month period ending June 30, 1996, premiums increased 10%
to $126,507,853 compared to $114,932,365 or 3% for the same six 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 June 30, 1996,
were 121,244. This represents a net increase of 7,524 or 7% compared to a net
increase of 6,741 or 7% for the same six month period in 1995. New certificates
issued during the six month period ending June 30, 1996, were 23,565 compared to
24,100 for the same period in 1995. Lapses were down to 16,041 for the six month
period ending June 30, 1996 compared to 17,359 in 1995.
Net investment income increased 7% for the quarter ending June 30, 1996
compared to a 9% decrease for the same quarter in 1995. For the six month
period ending June 30, 1996 net investment income increased to $3,279,169 or 5%
compared to $3,114,214 in 1995, which was a 3% decrease for the same period.
The main reason for the decreases 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
$51,556,074 or 30% for the quarter ending June 30, 1996, compared to $39,746,933
or a 4% increase for the same period in 1995. The loss ratio for quarter ending
June 30, 1996 was 79.2% compared to 68.7%
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<PAGE> 8
for the same quarter in 1995. Although the ratio is higher in 1996 it did
decrease 3% from the first quarter of 1996, which was 81.6%. For the six month
period ending June 30, 1996, benefits, claims, losses and settlement expenses
increased to $101,681,638 or 27% compared to $80,320,496 or 3% for the same six
month period in 1995. The loss ratio for the six month period in 1996 was 80.4%
compared to 69.9% for the same six month period in 1995. The increase in
reserves for the six months ending June 30, 1996 was approximately $4.6 million.
The increase in claims during the quarter and six month period was primarily due
to the medical trend being much higher than planned, higher than expected
utilization of services and certain state mandates requiring guaranteed issue
and mandated benefits. These items have had an effect on the whole industry and
not just the Company. Also several large claims carried over into the second
quarter. 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 13.6% of premiums for the quarter ending June 30, 1996
compared to 14.5% for the same quarter in 1995. For the six month period ending
June 30, 1996 commissions were 13.7% of premiums compared to 14.5% for the same
six 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 3% to $9,678,714 for the quarter ending
June 30, 1996 compared to $9,411,818 for the same quarter in 1995. The increase
in the second quarter of 1996 was primarily due to printing and advertising
costs related to new policies, training tapes and brochures. For the six month
period ending June 30, 1996 other operating expenses increased 4% to $18,404,558
compared to $17,674,739 or 6% for the same period in 1995. For 1996 the ratio to
premiums was 14.5% compared to 15.4% in 1995.
The Company incurred losses of $2,669,828 ($.63 per share) for the quarter
and $6,068,585 ($1.43 per share) for the six months ending June 30, 1996. This
compares to profits of $1,289,967 ($.31 per share) for the quarter and
$2,390,867 ($.57 per share) for the six months ending June 30, 1995. As
indicated, the primary reason for the losses in 1996 was the large increase in
claims.
The book value per share at June 30, 1996 was $5.96 ($6.28 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
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<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.
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<PAGE> 10
PART II - OTHER INFORMATION
---------------------------
All items of Part II other than Item 4 and Item 6 are either inapplicable
to Registrant or would not require a response.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
a) Central Reserve Life Corporation's 1995 Annual Meeting of
Shareholders was held on May 16, 1996.
b) Proxies were solicited by Central Reserve Life Corporation's
management pursuant to Regulation 14 under the Securities
Exchange Act of 1934, there was no solicitation in opposition
to management's nominees as listed in the proxy statement, and
all of such nominees were elected to the classes indicated in
the proxy statement pursuant to the vote of the stockholders.
The total number of shares of the Company's Common Stock, no par value,
outstanding as of April 3, 1996, the record date for the Annual Meeting, was
4,037,500.
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> 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: August 12, 1996 By: Frank W. Grimone
------------------------------- ---------------------------
Frank W. Grimone
Executive Vice President
Date: August 12, 1996 By: Frank W. Grimone
------------------------------- ---------------------------
Frank W. Grimone
Principal Financial Officer and
Chief Accounting Officer
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<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
4,224,552 for the six month period ending June 30, 1996 and 4,209,725 for the
six month period ending June 30, 1995.
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<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000215403
<NAME> Central Reserve Life Corporation
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 72,184,222
<DEBT-CARRYING-VALUE> 11,924,311
<DEBT-MARKET-VALUE> 11,594,307
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 87,356,801
<CASH> 5,819,411
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 299,289
<TOTAL-ASSETS> 112,680,079
<POLICY-LOSSES> 32,362,670
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 37,528,022
<POLICY-HOLDER-FUNDS> 5,845,667
<NOTES-PAYABLE> 8,552,548
<COMMON> 2,023,750
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 112,680,079
126,507,853
<INVESTMENT-INCOME> 3,279,169
<INVESTMENT-GAINS> 7,406
<OTHER-INCOME> 0
<BENEFITS> 101,681,638
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 35,727,854
<INCOME-PRETAX> (7,615,064)
<INCOME-TAX> (1,546,479)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,068,585)
<EPS-PRIMARY> (1.43)
<EPS-DILUTED> (1.43)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
