<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, 1997
[ ] 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,
1997 was 4,145,172.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
A. Consolidated Condensed Balance Sheets
B. Consolidated Condensed Statements of Operations
C. Consolidated Condensed Statements of Cash Flows
D. Notes to Consolidated Condensed Financial Statements
-2-
<PAGE> 3
CENTRAL RESERVE LIFE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
------------- ---------------
(Unaudited)
ASSETS
<S> <C> <C>
Investments:
Fixed maturities held to maturity, at amortized cost $ 11,897,198 $ 11,892,925
Fixed maturities available for sale, at fair value 68,078,642 67,608,937
------------- -------------
Total fixed maturities 79,975,840 79,501,862
Policy loans 114,383 111,646
Short-term investments, at cost which approximate market 6,013,525 11,109,910
------------- -------------
Total investments 86,103,748 90,723,418
Cash 8,623,108 8,472,255
Accrued investment income 1,158,449 988,536
Premiums receivable 3,167,694 3,049,026
Property and equipment, at cost 10,981,394 11,196,987
Deferred federal income taxes 948,363 948,363
Federal income taxes recoverable 2,720,530 2,245,530
Other assets 2,366,950 1,764,582
------------- -------------
$ 116,070,236 $ 119,388,697
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits, losses and claims $ 33,301,136 $ 33,741,819
Other policy claims and benefits payable 43,003,683 42,909,065
Other policyholders' funds 7,564,142 6,510,894
Other liabilities 5,043,428 6,255,346
------------- -------------
88,912,389 89,417,124
Mortgage note payable 8,478,511 8,503,776
------------- -------------
Total liabilities 97,390,900 97,920,900
------------- -------------
Commitments and contingencies
Shareholders' equity:
Non-Voting Preferred shares, no par value - -
Common shares, no par value, stated value $.50 2,072,586 2,072,586
Additional paid-in capital 4,005,819 4,005,819
Net unrealized holding gain (loss) (1,208,073) (247,637)
Retained earnings 13,809,004 15,637,029
------------- -------------
Total shareholders' equity 18,679,336 21,467,797
------------- -------------
$ 116,070,236 $ 119,388,697
============= =============
</TABLE>
-3-
<PAGE> 4
CENTRAL RESERVE LIFE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
March 31
1997 1996
------------ ------------
<S> <C> <C>
REVENUES
Premiums $ 67,224,069 $ 61,397,347
Net investment income 1,624,855 1,689,206
Net realized investment gains 850 257
------------ ------------
68,849,774 63,086,810
------------ ------------
BENEFITS, LOSSES AND EXPENSES
Benefits, claims, losses and settlement expenses 53,204,489 50,125,564
Commissions 9,184,864 8,474,159
Other operating expenses 8,763,446 8,725,844
------------ ------------
71,152,799 67,325,567
------------ ------------
Income (loss) before federal income taxes (2,303,025) (4,238,757)
Federal income tax expense (benefit) (475,000) (840,000)
============ ============
Net income (loss) $ (1,828,025) $ (3,398,757)
============ ============
Basic earnings (loss) per share $ (.44) $ (.84)
Diluted earnings (loss) per share $ (.43) $ (.80)
</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
1997 1996
--------------- -------------
<S> <C> <C>
INSURANCE COMPANY ACTIVITIES
Cash provided by (used by) operating activities $(3,678,354) $(3,314,841)
Purchases of investments (2,681,255) (3,298,155)
Sales or maturities of investments 6,385,432 3,649,923
Purchase of property and equipment -- (79,450)
Dividends paid -- (500,000)
----------- -----------
Increase (decrease) in cash from insurance activities 25,823 (3,542,523)
----------- -----------
NON-INSURANCE ACTIVITIES
Dividends from subsidiaries -- 500,000
Dividends paid to shareholders -- (524,875)
Other, net 125,030 192,712
----------- -----------
Increase from non-insurance activities 125,030 167,837
----------- -----------
Cash at beginning of period 8,472,255 9,102,020
=========== ===========
Cash at end of period $ 8,623,108 $ 5,727,334
=========== ===========
</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, 1996,
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, 1997 and the
consolidated condensed statements of operations and cash flows for the
three months ended March 31, 1997 and 1996 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, 1997 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, 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. Trial of the matter is scheduled to begin
June 2, 1997.
4. The Ohio Department of Insurance imposes risk-based capital (RBC)
requirements on insurance enterprises, including the Company's subsidiary
Central Reserve Life Insurance Company (Central). The RBC Model serves as a
benchmark for the regulation of life insurance companies by state insurance
regulators and provides for targeted surplus levels based on formulas which
specify various weighting factors that are applied to financial balances or
various levels of activity based on the perceived degree of risk, and are
set forth in the RBC requirements. Such formulas focus on four general
types of risk: (a) the risk with respect to the company's assets (asset or
default risk); (b) the risk of adverse insurance experience with respect to
the company's liabilities and obligations (insurance or underwriting risk);
(c) the interest rate risk with respect to the company's business
(asset/liability matching); and, (d) all other business risks (management,
regulatory action, and contingencies). The amount determined under such
formulas is called the Authorized Control Level RBC (ACL).
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<PAGE> 7
The RBC guidelines define specific capital levels based on a company's ACL,
that are determined by the ratio of the company's total adjusted capital
(TAC) to its ACL. TAC is equal to statutory capital, plus or minus certain
other specified adjustments. The specific capital levels, in declining
order, and applicable ratios are generally as follows: "Company Action
Level" where TAC is less than or equal to 2.0 times ACL; "Regulatory Action
Level" where TAC is less than or equal to 1.5 ACL; "Authorized Control
Level" where TAC is less than or equal to 1.0 times ACL; and, "Mandatory
Control Level" where TAC is less than or equal to 0.7 times ACL. Companies
at the Company Action Level must submit a RBC financial plan to the
insurance commissioner of the state of domicile. Companies at the
Regulatory Action Level are subject to a mandatory examination or analysis
by the commissioner and possible required corrective actions. At the
Authorized Control Level, a company is subject to, among other things, the
commissioner placing it under regulatory control. At the Mandatory Control
Level, the insurance commissioner is required to place a company under
regulatory control. At December 31, 1996, Central's TAC was $17,137,515 or
1.4 times its ACL and accordingly, Central was at the Regulatory Action
Level. The RBC calculation is done annually.
On March 5, 1997, Central filed its RBC financial plan with the Ohio
Department of Insurance (ODI) outlining plans for attaining the levels of
RBC required to raise the Company's RBC above the Company Action Level. The
RBC financial plan identifies the conditions that contributed to the
Regulatory Action Level, including underpricing of a new product, PMO, sold
primarily in 1995, and state mandated benefits and guaranteed issue. The
RBC financial plan also contains corrective actions taken by Central
beginning April 1, 1996, including an increase of PMO premium rates,
changes in certain policy benefits and the renegotiating of certain
provider contracts to produce further cost savings. The PMO plan
represented approximately 40% of Central's premiums collected in 1996.
Since the PMO plan is monthly business, the rate action taken on April 1,
1996 will not be completed until the end of March 1997. In addition to
these corrective actions, the Company had engaged an investment banking
firm to assist the Company is its efforts to raise additional capital for
Central. Raising of additional capital will be necessary to raise Central's
RBC above the Company Action Level within the short term. The ODI notified
Central that the action plan submitted was acceptable for implementation,
subject to examination of Central's 1996 year-end claim reserves and
current premium rate levels. Failure to meet the capital requirements and
interim capital targets included in Central's RBC financial plan could
expose Central to such actions by the ODI as being placed under regulatory
control. Management believes, that Central will be able to meet the plan's
capital requirements and interim targets. The accompanying consolidated
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
5. The results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results for the full year.
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<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY: The assets of the Company and its major subsidiary, Central
Reserve Life Insurance Company (Central), decreased approximately 3% for the
period ended March 31, 1997. Central primarily invests in bonds which amounts to
about 69% of the total assets. Central does not have any so-called "junk" bonds
or what is considered high yield type securities and 97% of the bonds are of
investment grade quality. Current assets and short term investments (not
including government bonds of about $17 million which have a ready market)
amounted to about 16% of total assets. In accordance with SFAS 115 the Company
recorded unrealized losses of $1,208,073 at March 31, 1997, to reflect the
reporting of certain investments at fair value which was lower than amortized
cost. This compares to unrealized losses of $247,637 at December 31, 1996. The
difference between the fair value and the amortized cost is reflected in
shareholders' equity.
Reserves and accruals for future claim payments decreased slightly from
$76,650,884 at December 31, 1996 to $76,304,819 at March 31, 1997, due to a
slight decrease in the annuity reserves. Shareholders' equity decreased to
$18,679,336 at March 31, 1997 after a $960,436 net decrease due to the SFAS 115
adjustment.
CAPITAL RESOURCES: Central suffered a large decrease in its statutory
capital and surplus to $16,595,497 at December 31, 1996 from $27,477,972 at
December 31, 1995. The decrease was primarily due to the $9,321,633 statutory
loss, after tax benefits of $2,810,830. This decrease caused Central to fall
under the regulatory action level (RAL) imposed by the Ohio Department of
Insurance under the recently adopted Risk-Based Capital (RBC) requirements on
insurance enterprises (see note 4). Central's adjusted capital, under the RBC
standards, which is only calculated at year end, at December 31, 1996, was
$17,137,515 and the RAL was $18,508,044 at December 31, 1996. Central is
required to, and did, submit a RBC financial plan to the Ohio Department of
Insurance reflecting certain projections and steps to be taken to return the
adjusted capital to the required levels. The statutory capital and surplus was
$14,751,927 at March 31, 1997. The Company is exploring opportunities to raise
capital to contribute to Central and has engaged an investment banking firm to
assist and advise them in this matter.
RESULTS OF OPERATIONS: During the three months ending March 31, 1997,
premiums increased to $67,224,069 compared to $61,397,347 for the same period
last year. This represents a 9% increase in 1997 over 1996 as compared to an 8%
increase in 1996 over 1995. The increase, which was primarily due to rate
renewals, 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, 1997 decreased 4,704 from December 31, 1996 to 111,600
or 4%, compared to a 3% increase for the same period in 1996. Lapses were 12,670
in 1997 up about 50% from 8,442 in 1996. New certificates issued during the
first quarter of 1997 were 7,966 compared to 12,020 for the same quarter in
1996. The main reason for the decrease in new certificates is the ongoing
efforts of the agents to retain existing business in the renewal cycle which has
taken time and efforts away from marketing new products. The larger than normal
increase in lapses was primarily due to the conversion of several older products
in three states and a large rate increase for first quarter renewals that were
prior to the April 1, 1996 rate renewal action.
-8-
<PAGE> 9
Net investment income decreased about 4% to $1,624,855 for the quarter
ending March 31, 1997 compared to $1,689,206 in 1996, which was a 3% increase. A
decrease of 5% in investments was the primary reason for the lower investment
income.
Policy benefits, claims, losses and settlement expenses increased 6% to
$53,204,489 for the first quarter in 1997 compared to $50,125,564, or an
increase of 24% in 1996. The incurred loss ratio for the quarter was 79.1% in
1997 compared to 81.6% in 1996. Approximately $1 million of the increase in 1996
was due to charges for surrenders of annuity policies. The major reason for the
higher claims continues to be high utilization and state mandates, along with
the 1995 underpriced business. During the first quarter of 1997 the rate renewal
actions that were started April 1, 1996 continued as it was the last quarter of
the first twelve month cycle for rate renewal increases on the 1995 block of
business. The claims level appears to have stabilized, indicating the renewal
actions are working. However, as part of the renewal plan certain conversion
actions were taken for older policies, which along with regular rate renewal
increases caused a higher lapse ratio during the first quarter of 1997. A
run-off of claims from these policies also increased the loss ratio for the
period.
Commissions increased about 8% to $9,184,864 for the quarter ending March
31, 1997 compared to $8,474,159 for the same quarter in 1996. The ratio to
premiums, however, was 13.7% in 1997 and 13.8% in 1996.
Other operating expenses increased slightly to $8,763,446 in the first
quarter of 1997 as compared to $8,725,844 or a 6% increase in 1996. The main
areas for expenses continue to be payroll, postage and printing.
The Company incurred a net loss of $1,828,025 ($.44 per share) for the
first quarter ending March 31, 1997 down 46% from $3,398,757 ($.84 per share) in
the same quarter in 1996. As indicated, the primary reason for the loss was in
the claims area.
The book value per share at March 31, 1997 was $4.51 ($4.80 before
unrealized losses) compared to $5.18 ($5.24 before unrealized gains) at December
31, 1996.
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.
-9-
<PAGE> 10
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.
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: May 12, 1997 By: Frank W. Grimone
-------------------- --------------------
Frank W. Grimone
Executive Vice President
Date: May 12, 1997 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
-----------------------------------------------------
The Company has adopted FASB Statement No. 128, Earnings Per Share
(Statement 128) effective January 1, 1997. Statement 128 was issued to simplify
the computation of EPS and to make the U.S. standard more compatible with the
EPS standards of other countries and that of the International Accounting
Standards Committee (IASC). It replaces Primary EPS and Fully Diluted EPS with
Basic EPS and Diluted EPS, respectively.
Basic EPS, unlike Primary EPS, excludes all dilution while Diluted EPS,
like Fully Diluted EPS, reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
The number of shares used to calculate the basic earnings (loss) per share
was 4,145,172 for the three month period ending March 31, 1997 and 4,037,500 for
the three month period ending March 31, 1996. The number of shares used to
calculate the diluted earnings (loss) per share was 4,282,910 for the three
months ending March 31, 1997 and 4,235,151 for the three months ending March 31,
1997.
-12-
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 68,078,642
<DEBT-CARRYING-VALUE> 11,897,198
<DEBT-MARKET-VALUE> 11,570,010
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 86,103,748
<CASH> 8,623,108
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 324,809
<TOTAL-ASSETS> 116,070,236
<POLICY-LOSSES> 33,301,136
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 43,003,683
<POLICY-HOLDER-FUNDS> 7,564,142
<NOTES-PAYABLE> 8,478,511
<COMMON> 2,072,586
0
0
<OTHER-SE> 16,606,750
<TOTAL-LIABILITY-AND-EQUITY> 116,070,236
67,224,069
<INVESTMENT-INCOME> 1,624,855
<INVESTMENT-GAINS> 850
<OTHER-INCOME> 0
<BENEFITS> 53,204,489
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 17,948,310
<INCOME-PRETAX> (2,303,025)
<INCOME-TAX> (475,000)
<INCOME-CONTINUING> (1,828,025)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,828,025)
<EPS-PRIMARY> (.44)
<EPS-DILUTED> (.43)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
