<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
[ ] 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
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(Exact name of registrant as specified in its charter)
OHIO 34-1017531
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17800 ROYALTON ROAD, STRONGSVILLE, OHIO 44136
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (440) 572-2400
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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,
1998 was 4,195,172.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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A. Consolidated Condensed Balance Sheets
B. Consolidated Condensed Statements of Operations
C. Consolidated Condensed Statements of Shareholder's Equity
D. Consolidated Condensed Statements of Cash Flows
E. Notes to Consolidated Condensed Financial Statements
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<PAGE> 3
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 30 DECEMBER 31
1998 1997
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(UNAUDITED)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities held to maturity, at amortized cost $ 11,389,470 $ 11,898,627
Fixed maturities available for sale, at estimated fair value 75,413,000 67,961,886
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Total fixed maturities 86,802,470 79,860,513
Policy loans 97,822 96,211
Short-term investments, at cost which approximates market 3,512,072 1,970,406
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Total investments 90,412,364 81,927,130
Cash 6,247,780 5,632,459
Cash - restricted 4,419,032 3,930,956
Accrued investment income 1,293,814 1,123,693
Premiums receivable 1,868,911 2,098,243
Reinsurance receivable 31,484,082 26,215,765
Property and equipment, net 10,726,998 10,966,512
Deferred federal income taxes 1,285,437 1,356,000
Other assets 1,848,781 2,552,819
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$ 149,587,199 $ 135,803,577
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits, losses and claims $ 24,686,157 $ 24,903,497
Other policy claims and benefits payable 67,442,490 56,186,802
Deferred reinsurance gain 12,419,546 10,000,000
Other policyholders' funds 8,512,129 7,565,341
Other liabilities 8,864,914 7,237,067
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121,925,236 105,892,707
Note payable 20,000,000 20,000,000
Mortgage note payable 8,371,255 8,399,028
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Total liabilities 150,296,491 134,291,735
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Shareholders' equity:
Non-Voting Preferred shares, no par value, authorized - -
2,000,000 none issued
Common shares, no par value, stated value $.50, authorized
15,000,000 issued and outstanding 4,195,172 in 1998 and 1997
(800,000 are reserved for warrants) 2,097,586 2,097,586
Additional paid-in capital 4,122,319 4,122,319
Accumulated other comprehensive income 748,241 611,264
Retained earnings (accumulated deficit) (7,677,438) (5,319,327)
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Total shareholders' equity (deficit) (709,292) 1,511,842
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$ 149,587,199 $ 135,803,577
============= =============
</TABLE>
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<PAGE> 4
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1998 1997
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<S> <C> <C>
REVENUES:
Gross premiums $ 65,933,006 $ 67,706,137
Reinsurance ceded (29,770,075) (482,068)
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Net premiums 36,162,931 67,224,069
Net investment income 1,950,675 1,624,855
Net realized gains (losses) (9,097) 850
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38,104,509 68,849,774
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BENEFITS, LOSSES AND EXPENSES:
Benefits, claims, losses and settlement expenses 28,223,446 53,204,489
Commissions 6,428,705 9,184,864
Other operating expenses 4,945,063 8,561,680
Interest expense and financing costs 865,406 201,766
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40,462,620 71,152,799
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Income (loss) before Federal income taxes (2,358,111) (2,303,025)
Federal income tax expense (benefit) - (475,000)
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Net income (loss) $ (2,358,111) $ (1,828,025)
============ ============
Earnings (loss) per common share:
Basic $ (.56) $ (.44)
Diluted $ (.56) $ (.44)
Previously reported N/A $ (.44)
</TABLE>
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<PAGE> 5
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDER'S EQUITY
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
RETAINED ACCUMULATED TOTAL
ADDITIONAL EARNINGS OTHER SHAREHOLDER'S
COMMON PAID-IN (ACCUMULATED COMPREHENSIVE EQUITY
SHARES CAPITAL DEFICIT) INCOME (LOSS) (DEFICIT)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1997
BALANCE, JANUARY 1, 1997 $ 2,072,586 $ 4,005,819 $ 15,637,029 ($ 247,637) $ 21,467,797
Comprehensive income (loss):
Net income (loss) - - (1,828,025) - (1,828,025)
Other comprehensive
income (loss), net:
Unrealized holding (losses)
on securities - - - (960,997) (960,997)
Reclassification adjustment
for gains included in net income - - - 561 561
------------ ------------ ------------ ------------ ------------
Other comprehensive income (loss) - - - (960,436) (960,436)
------------ ------------ ------------ ------------ ------------
Comprehensive income (loss) - - (1,828,025) (960,436) (2,788,461)
------------ ------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1997 $ 2,072,586 $ 4,005,819 $ 13,809,004 ($ 1,208,073) $ 18,679,336
============ ============ ============ ============ ============
1998
BALANCE, JANUARY 1, 1998 $ 2,097,586 $ 4,122,319 ($ 5,319,327) $ 611,264 $ 1,511,842
Comprehensive income (loss):
Net income (loss) - - (2,358,111) - (2,358,111)
Other comprehensive income, net:
Unrealized gain on securities - - - 130,973 130,973
Reclassification adjustment
for gains included in net income - - - 6,004 6,004
------------ ------------ ------------ ------------ ------------
Other comprehensive income (loss) - - - 136,977 136,977
------------ ------------ ------------ ------------ ------------
Comprehensive income (loss) - - (2,358,111) 136,977 (2,221,134)
------------ ------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1998 $ 2,097,586 $ 4,122,319 ($ 7,677,438) $ 748,241 ($ 709,292)
============ ============ ============ ============ ============
</TABLE>
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<PAGE> 6
CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,358,111) $ (1,828,025)
Adjustments to recconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 235,339 258,617
Net realized (gains) losses 9,097 (850)
Deferred federal income taxes 70,563 -
Changes in assets and liabilities:
Restricted cash (488,076) (142,099)
Premiums receivable (229,332) 118,668
Reinsurance receivable (219,806) (98,360)
Federal income taxes recoverable - (475,000)
Accrued investment income (170,121) (169,913)
Other assets 772,153 (504,010)
Future policy benefits, claims and funds payable 12,505,842 1,382,439
Other liabilities 2,100,855 (1,154,531)
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Net cash provided by (used in) operating activities 12,228,403 (2,613,064)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Securities available-for-sale:
Purchases (12,667,360) (2,678,518)
Sales - -
Maturities and calls 5,452,245 1,289,047
Securities held-to-maturity:
Purchases - -
Maturities and calls 509,157 -
Net (additions) deletions to furniture and equipment 354,169 (387,312)
Net proceeds (purchase) of investments - short-term (1,541,666) 5,096,385
Policy loans 1,611 2,737
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Net cash provided (used in) investing activities (7,891,844) 3,322,339
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in annuity account balances 142,830 283,369
Decrease in annuity account balances (1,207,330) (958,625)
Principal payments on long-term debt (27,773) (25,265)
Reinsurance ceding allowance (2,628,965) -
------------ ------------
Net cash provided by (used in) financing activities (3,721,238) (700,521)
------------ ------------
Net increase (decrease) in cash 615,321 8,754
Cash at beginning of year 5,632,459 4,649,832
------------ ------------
Cash at end of quarter $ 6,247,780 $ 4,658,586
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 865,406 $ 201,766
Cash paid (received) during the period for income taxes - -
</TABLE>
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<PAGE> 7
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, 1997,
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, 1998 and the
consolidated condensed statements of operations and cash flows for the
three months ended March 31, 1998 and 1997 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, 1998 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. (A
current examination of the tax returns for 1993 through 1996 was started in
April 1998.) 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 were approximately $2.4 million of which $215,303 was paid in
1994 and $590,000 paid in 1997. 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 based on discussions with counsel management believes existing law
supports the Company's position. Therefore, the Company has not recorded a
liability for the difference. The tax case is currently on the May 18,
1998, trial calendar of the United States Tax Court at Cleveland, Ohio, but
it is expected that the case will be submitted as a legal issue, i.e.,
without the need for a trial.
If the IRS were to prevail in its position that Central no longer qualifies
as a life company for tax purposes, approximately $2.6 million of tax and
interest would be payable and 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 qualifications as a life
company for tax purposes in the future, if the need arises.
4. Note Payable - Concurrent with the signing of the Original Stock Purchase
Agreement, the Company entered into a $20 million loan on December 16,
1997. The note is due June 30, 1998 and interest is payable monthly at the
prime rate as in effect from time to time (8.5% at March 31, 1998). The
note is collateralized by 100% of the common shares of Central. If
Shareholder approval of the New Stock Purchase Agreement is not obtained,
it is likely that the Company will not have the ability to repay the $20
million loan and will be required immediately to locate an alternate source
of financing to meet its obligations and to fund its
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<PAGE> 8
operations. There can be no assurance that the Company would be able to
obtain such a refinancing at all or on terms that are favorable to the
Company or its Shareholders, particularly in light of Central's current
financial position and its recent efforts to obtain financing. The
Company's failure to obtain sufficient financing within the requisite time
may entitle Strategic Partners to exercise its rights as a secured
creditor, including by foreclosing upon all of the common shares of Central
which were pledged to Strategic Partners as collateral for the loan. As the
Company is a holding company with no operations and limited assets, such
foreclosure upon the Company's principal asset could result in the Common
Shares having little or no value, make it impossible for the Company to
continue operations, and/or force the Company to seek protection under
federal bankruptcy law.
5. Earnings Per Share - In February 1997, FASB issued Statement No. 128,
"Earnings Per Share". The Company adopted Statement 128, as required, for
its December 31, 1997 consolidated financial statements. Prior quarters
have been restated where appropriate. For the quarters presented, the
Company presents both basic and diluted earnings (loss) per share. Basic
earnings (loss) per share is computed by dividing the income (loss)
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings (loss) per share
reflects the potential dilution that could occur if common stock
equivalents (options/warrants) were exercised and then shared in the
earnings of the Company.
In computing diluted earnings per share, only potential common shares that
are dilutive, those that reduce earnings per share, are included. The
exercise of options and warrants is not assumed if the result would be
antidilutive, such as when a loss from continuing operations is reported.
The Company reported such a loss in both quarters for 1998 and 1997,
therefore the basic and diluted (loss) per share are the same. The weighted
average number of shares used in the calculation was 4,195,172 for 1998 and
4,145,172 for 1997.
6. On January 1, 1998, the Company adopted FASB Statement No. 130, "Reporting
Comprehensive Income". Statement 130 established standards for reporting
and display of comprehensive income and its components in a full set of
financial statements. Comprehensive income includes all changes in equity
during a period except those resulting from investments by shareholders and
distributions to shareholders and includes net income. Comprehensive income
for the three month period ended March 31, 1998 and 1997 has been presented
in the accompanying unaudited statements of shareholders' equity.
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<PAGE> 9
7. Reinsurance - Central entered into a 50/50 quota-share reinsurance treaty
in December 1997 on certain group accident and health policies. Under the
provisions of the treaty, Central cedes 50% of the premiums for these
policies and in return receives reimbursement for 50% of the claims plus a
commission and expense allowance. The following table reflects the effect
of the Hannover reinsurance treaty for the period.
Other reinsurance is considered immaterial for the Company.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31 MARCH 31
1998 1997
----------------- ------------------
<S> <C> <C>
Benefits, claims, etc. $ 51,550,770 $53,204,489
Reinsurance recoverable (23,327,324) -
----------------- ------------------
Net $ 28,223,446 $53,204,489
================= ==================
Commissions $ 9,153,165 $ 9,184,864
Commission allowance (2,724,460) -
----------------- ------------------
Net $ 6,428,705 $ 9,184,864
================= ==================
Other operating expenses $ 7,899,964 $ 8,561,680
Expense allowance (2,954,901) -
----------------- ------------------
Net $ 4,945,063 $ 8,561,680
================= ==================
</TABLE>
8. The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results for the full year.
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<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW: On March 30, 1998, the Company entered into an amended and
restated Stock Purchase Agreement in which the Company will issue and sell
7,300,000 Common Shares at $5.50 per share and warrants to purchase an
additional 3,650,000 Common Shares at an exercise price of $5.50 per share for
an aggregate purchase price of $40,150,000. The Company hopes to obtain
shareholder and regulatory approval and to close the transaction by June 30,
1998. Concurrent with the signing of the Original Stock Purchase Agreement,
Strategic Partners arranged for an interim loan of $20 million to the Company.
The loan is due June 30, 1998 and bears interest at the prime rate. Proceeds
from the loan, received in December 1997, were used to pay off a $5.2 million
bank loan and a contribution of $14 million, in the form of a surplus note, to
Central.
If Shareholder approval of the equity financing transaction is not
obtained, the $20,000,000 note and 800,000 of the 1,000,000 Guarantee Warrants,
which have already been issued will remain outstanding and enforceable against
the Company. The interim loan matures on June 30, 1998, at which time the
Company will be required to repay the loan. Because of regulatory restrictions,
it is highly unlikely the Company could receive the funds from Central. Thus, if
Shareholder approval of the Equity Financing is not obtained, it is likely that
the Company will not have the ability to repay its obligations and will be
required immediately to locate an alternate source of financing to meet its
obligations and to fund its operations. There can be no assurance that the
Company would be able to obtain such a refinancing at all or on terms that are
favorable to the Company or its Shareholders, particularly in light of Central's
current financial position and its recent efforts to obtain financing. The
Company's failure to obtain sufficient financing within the requisite time may
entitle Strategic Partners to exercise its rights as a secured creditor,
including by foreclosing upon all of the common shares of Central which were
pledged to Strategic Partners as collateral for the interim loan. As the Company
is a holding company with no operations and limited assets, such foreclosure
upon the Company's principal asset could result in the Common Shares having
little or no value, make it impossible for the Company to continue operations,
and/or force the Company to seek protection under federal bankruptcy law.
The Company believes that if the Equity Financing is approved and
consummated, its effect, together with the financing transactions described
above and below, recent expense reductions, and internally generated funds,
should enable the Company to finance the planned growth for the foreseeable
future. If additional funds are required for long-term growth, the Company
believes that these funds could be obtained through equity or debt offerings as
market conditions permit or dictate.
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue. The Year
2000 problem is the result of computer programs being written using two digits
rather than four to define the applicable year. Any of the Company's programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a major system failure or
miscalculations. The Company entered into an Administrative Services Agreement
in March
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<PAGE> 11
1998 to outsource its computer operations with an independent vendor. The vendor
is already in compliance with the Year 2000 issue, so there should be no
material additional costs incurred by the Company for the Year 2000 issue.
RESULTS OF OPERATIONS: During the three months ending March 31, 1998, gross
premiums were $65,933,006 compared to $67,706,137 for the same period last year.
This represents about a 3% decline in 1998 from 1997, as compared to a 9%
increase in 1997. Reinsurance premiums ceded increased to $29,770,075 for the
first quarter of 1998 compared to $482,068 for the first quarter of 1997. The
increase is due to the 50/50 quota-share reinsurance treaty entered into with
Reassurance Company of Hannover (Hannover) in December 1997. Net premiums were
$36,162,931 for the first quarter of 1998 compared to $67,224,069 for the first
quarter of 1997. Net certificates in force for the three months ending March 31,
1998 increased slightly to 105,016 from 104,687 at December 31, 1997. This
compares to a decrease of 4,704 or 4% in the same period in 1997. New
certificates issued during the first quarter of 1998 were 9,750, up 22% from
7,966 in 1997. Lapses were 9,421 in 1998 compared to 12,670 in 1997, a decrease
of 26%. The large number of lapses in 1997 was primarily due to a conversion
program of older products in several states along with large rate increases. The
increase in new certificates issued in 1998 was also related to the infusion of
capital into Central, improving the Risk-Based Capital levels above regulatory
action levels, making Central's marketing position more stable.
Net investment income increased to $1,950,675 for the quarter ending
March 31, 1998, compared to $1,624,855 for the same quarter in 1997. Included in
the 1998 amount is $359,249 of investment income generated from the reinsurance
treaty with Hannover. Without the $359,249 effect, the Company showed a slight
decrease in investment income from the fixed maturities of 2% to $1,591,426 in
1998 from the $1,624,855 for 1997. A negative cash flow in 1997 and the transfer
of assets for the Hannover reinsurance treaty had lowered the amount invested in
fixed maturities at the beginning of the first quarter in 1998, which was the
major cause for the lower investment income.
Benefits and claims incurred, after reinsurance, was $28,223,446 or a
78% loss ratio in 1998. Before reinsurance of $23,327,324 the total amount was
$51,550,770, also 78%, as compared to $53,204,489 or a 79% loss ratio for the
same quarter in 1997. Many of the benefit programs the Company has taken actions
on are taking longer to develop than originally anticipated. These programs such
as rating actions, underwriting changes, claim procedures and certain managed
care programs are scheduled to take place in the second and third quarters of
1998.
Commissions were $6,428,705 for the first quarter of 1998 after an
allowance of $2,724,460 from the Hannover reinsurance treaty. Before reinsurance
the amount was $9,153,165 for 1998 compared to $9,184,864 for the same quarter
in 1997.
Operating expenses were $4,945,063 for the first quarter of 1998 after
an expense allowance of $2,954,901 from the Hannover reinsurance treaty. Before
reinsurance total operating expenses were $7,899,964, 12% of premiums, down from
$8,561,680 or 12.7% of premiums for the same quarter in 1997. Certain expense
reduction actions were taken during the first quarter of 1998 but the majority
of the benefits from these reductions will not be realized until later during
the year.
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<PAGE> 12
Interest expense and financing costs increased to $865,406 in the first
quarter of 1998 compared to $201,766 for the same quarter in 1997. The major
reason for the increase was the interest on the $20,000,000 loan entered into in
December 1997.
LIQUIDITY AND CAPITAL RESOURCES: Liquidity is the ability of an enterprise
to generate adequate amounts of cash to meet its financial commitments. The
major needs for cash are to enable the Company's subsidiary, Central, 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. The Company has, in the past, relied on the dividend
from Central to enable it to pay dividends to shareholders. Central and the
Company discontinued paying dividends at the end of 1996 and no dividends were
paid in 1997. 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.
The majority of the Company's assets are in investments which were
$90,412,364, after a net unrealized holding gain (before taxes of $385,457) of
$1,133,968 (see below), or 60% of the total assets at March 31, 1998. Fixed
maturities are the primary investment of the Company and were $86,802,470 or 96%
of total investments at March 31, 1998. Other investments consist of short-term
securities and policy loans. The Company is carrying fixed maturities of
$11,389,470 at amortized cost (held to maturity) and fixed maturities of
$75,413,000 at estimated fair value (available for sale) at March 31, 1998. The
Company does not hold any so-called "junk" bonds or what are generally
considered high-yield type securities, and 98% of the bonds are of investment
grade quality. In accordance with Statement of Financial Accounting Standards
(Statement) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company recorded an increase in investments of $1,133,968 to
reflect the reporting of investments classified as available for sale at fair
value (estimated market value) which was higher than amortized cost. The amount
is reflected in shareholders' equity as "accumulated other comprehensive
income", net of $385,457 for taxes. In addition to the fixed maturities, the
Company also had $6.2 million in unrestricted cash and $3.5 million in
short-term investments at March 31, 1998.
During 1998, total assets increased about $13 million, however this was
offset by an increase in total liabilities of about $16 million after debt. The
major reasons for the increase in assets was due to the positive cash flow in
1998 from the premiums of Central and the lower cash payments for claims. (See
consolidated cash flow financial statements.) The lower cash payout for claims
was primarily due to a loss of staff in the first quarter and a reorganization
causing several unproductive days.
The liabilities accrued for future policy benefits and policy claims
payable were increased 20%, primarily to cover the backlog created in the first
quarter of 1998, in part, by the loss of personnel, to $92,128,647 at March 31,
1998 from $81,090,299 at December 31, 1997 or about $11 million. Certain group
accident and health reserves increased approximately $12 million, to $67 million
from $55.5 million, however this increase was offset by surrenders of annuity
policies during the period. Based on claims paid through March 31, 1998,
management believes the reserves established at December 31, 1997 were adequate.
Shareholders' equity decreased to a
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<PAGE> 13
negative $709,292 due to the 1998 operating loss, which included the
strengthening of reserves and costs incurred relative to seeking additional
capital. Although the Company's consolidated equity was a deficit of $709,292,
including unrealized holding gain of $748,241, Central's statutory capital and
surplus was $25,417,762 at March 31, 1998, which was above all Risk-Based
Capital action levels. Central's capital and surplus includes the $14 million
surplus note and the benefit of the $10 million ceding allowance from the
Hannover reinsurance treaty.
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 has not
increased proportionately. 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. However, there can be no assurance that
these efforts by the Company will fully offset the impact of inflation or that
premiums will equal or exceed increasing health care costs.
FORWARD LOOKING STATEMENTS: This report on Form 10-Q contains both
historical and forward-looking statements. Forward-looking statements are
statements other than historical information or statements of current condition.
These forward-looking statements relate to the plans and objectives of the
Company for future operations. In light of the risks and uncertainties inherent
in all future projections, the inclusion of the forward-looking statements
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved. Many factors could
cause the Company's actual results to differ materially from those in the
forward-looking statements, including the following: (I) the failure to
consummate the Equity Financing, (ii) the failure to successfully implement the
business plan for the Company; (iii) rising healthcare costs; (iv) business
conditions and competition in the health care industry; and (v) developments in
healthcare reform and other regulatory issues. The foregoing review of important
factors should not be construed as exhaustive and should be read in conjunction
with other cautionary statements that are included in this report. The Company
undertakes no obligation to update forward-looking statements to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
-13-
<PAGE> 14
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 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.
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 14, 1998 By: /s/ Frank W. Grimone
------------------- ----------------------------------
Frank W. Grimone
Senior Executive Vice President
Date: May 14, 1998 By: /s/ Frank W. Grimone
------------------- ----------------------------------
Frank W. Grimone
Principal Financial Officer and
Chief Accounting Officer
-14-
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIALS OF CENTRAL RESERVE LIFE CORPORATION AS FILED
ON FORM 10-Q FOR THE THREE MONTHS ENDING MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY RERFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000215403
<NAME> Central Reserve Life Corporation
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 11,389,470
<DEBT-CARRYING-VALUE> 74,413,000
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<EQUITIES> 0
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0
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36,162,931
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