<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 QUARTER ENDED JUNE 30, 1996
OR
( ) 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 1-11612
CAPITOL AMERICAN FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1052643
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1001 LAKESIDE AVENUE, CLEVELAND, OHIO 44114
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(216) 696-6400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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
---- ----
AS OF JULY 29, 1996, THERE WERE 17,489,190 COMMON SHARES WITHOUT PAR VALUE OF
THE REGISTRANT OUTSTANDING.
<PAGE> 2
CAPITOL AMERICAN FINANCIAL CORPORATION
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PAGE
NO.
- - --------------------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION:
<S> <C> <C>
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 1996 (unaudited) and December 31, 1995 3
Condensed Consolidated Statements of Income -
Three and Six Months Ended June 30, 1996 (unaudited) and 1995
(unaudited) 4
Condensed Consolidated Statement of Shareholders' Equity - Six
Months Ended June 30, 1996 (unaudited) 5
Condensed Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1996 (unaudited) and 1995 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-13
PART II. OTHER INFORMATION:
Item 4 - Submission of Matters to a Vote of Security Holders 14
Item 6 - Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
- 2 -
<PAGE> 3
CAPITOL AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
(Amounts in thousands, except share data) 1996 1995
=============================================================================== ===============================
(Unaudited)
<S> <C> <C>
Assets
Investments:
Fixed maturities held-to-maturity, at amortized cost
(fair value $448,852 in 1996 and $503,813 in 1995) $351,826 339,379
Securities available-for-sale at fair value:
Fixed maturities (cost $313,600 in 1996 and $261,247 in 1995) 309,260 290,281
Equity securities (cost $7,671 in 1996 and $8,453 in 1995) 8,834 9,792
Short-term investments, at cost which approximates fair value 50 50
- - -----------------------------------------------------------------------------------------------------------------
Total investments 669,970 639,502
Cash 2,213 7,617
Accrued investment income 8,286 7,597
Agents' advances, net of allowance for uncollectible amounts
of $991 in 1996 and $1,154 in 1995 12,220 12,569
Premiums in course of collection 5,759 5,785
Prepaid commissions 6,636 6,982
Deferred policy acquisition costs 266,381 258,177
Office equipment and leasehold improvements, net of accumulated
depreciation and amortization of $7,563 in 1996 and $6,794 in 1995 4,786 5,467
Other assets 4,186 4,586
- - -----------------------------------------------------------------------------------------------------------------
Total assets $980,437 948,282
=================================================================================================================
Liabilities and Shareholders' Equity
Liabilities:
Insurance policy reserves and liabilities:
Future policy benefits $512,599 471,702
Unpaid claims 39,247 37,473
Unearned premiums 36,055 35,345
- - -----------------------------------------------------------------------------------------------------------------
Total reserves 587,901 544,520
Notes payable 29,500 24,000
Accounts payable, accrued expenses, and other liabilities 16,905 28,984
Deferred federal income taxes 51,844 59,048
- - -----------------------------------------------------------------------------------------------------------------
Total liabilities 686,150 656,552
- - -----------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred shares, without par value; authorized 5,000,000 shares
No shares issued or outstanding -- --
Common Shares, without par value; authorized 40,000,000 shares
Outstanding net of treasury shares: 17,489,190 shares in 1996
and 17,454,290 shares in 1995 57,495 57,469
Net unrealized (loss) gain on securities available-for-sale, net of deferred
federal income tax (benefit) expense of ($1,112) in 1996 and $10,626 in 1995 (2,065) 19,747
Retained earnings 260,881 237,304
Treasury shares: 1,032,400 shares in 1996 and 1,067,300 shares in 1995 (22,024) (22,790)
- - -----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 294,287 291,730
Commitments and contingencies (Note 2)
Total liabilities and shareholders' equity $980,437 948,282
=================================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE> 4
CAPITOL AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------
(Amounts in thousands, except for share and per share data) 1996 1995 1996 1995
==============================================================================================================================
<S> <C> <C> <C> <C>
Revenues:
Premiums earned $72,962 69,940 146,641 138,980
Income from investments 13,852 11,910 27,247 23,329
Realized capital gains 32 -- 122 --
Other income 7 21 24 43
- - ------------------------------------------------------------------------------------------------------------------------------
Total revenues 86,853 81,871 174,034 162,352
- - ------------------------------------------------------------------------------------------------------------------------------
Benefits and expenses:
Policy benefits 19,564 19,162 40,022 37,165
Increase in future policy benefits 20,449 18,887 40,897 38,080
Renewal commissions 10,654 10,245 21,433 20,356
Amortization of deferred policy acquisition costs 6,810 5,832 12,267 10,952
General and administrative 8,239 8,117 16,730 18,408
Interest 550 622 1,044 1,252
- - ------------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 66,266 62,865 132,393 126,213
- - ------------------------------------------------------------------------------------------------------------------------------
Income before federal income taxes 20,587 19,006 41,641 36,139
- - ------------------------------------------------------------------------------------------------------------------------------
Federal income taxes:
Current 6,137 4,866 10,035 10,688
Deferred 1,070 1,800 4,535 2,491
- - ------------------------------------------------------------------------------------------------------------------------------
Total federal income taxes 7,207 6,666 14,570 13,179
- - ------------------------------------------------------------------------------------------------------------------------------
Net income $13,380 12,340 27,071 22,960
==============================================================================================================================
Net income per weighted average Common Share $0.77 0.71 1.55 1.31
==============================================================================================================================
Cash dividends per Common Share $0.10 0.09 0.20 0.18
==============================================================================================================================
Weighted average Common Shares outstanding 17,489,190 17,457,857 17,480,709 17,483,847
==============================================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE> 5
CAPITOL AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Six Months Ended June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Appreciation
(Depreciation)
of Total
Available- Common Share-
Common for-Sale Retained Shares in holders'
(Amounts in thousands, except share and per share data) Stock Securities Earnings Treasury Equity
==========================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $57,469 19,747 237,304 (22,790) $291,730
Net income 27,071 27,071
Cash dividends paid on Common Shares,
$0.20 per share (3,494) (3,494)
Net unrealized loss on securities available-for-sale,
net of federal income tax (21,812) (21,812)
Stock options 26 26
Reissuance of 34,900 treasury shares 766 766
- - ---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 $57,495 (2,065) 260,881 (22,024) $294,287
==========================================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-5-
<PAGE> 6
CAPITOL AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------
(Amounts in thousands) 1996 1995
=========================================================================================================
<S> <C> <C>
Cash flows from operating activities:
Net income $27,071 22,960
Adjustments to reconcile net income to net cash
provided from operating activities:
Gain on call of equity securities available-for-sale (122) --
Depreciation and amortization of office
equipment and leasehold improvements 770 666
Deferred federal income taxes 4,535 2,491
Increase in insurance policy reserves and liabilities 43,381 41,724
Decrease (Increase) in premiums in course of collection 26 (37)
Increase in deferred policy acquisition costs (20,471) (22,030)
Amortization of deferred policy acquisition costs 12,267 10,952
Increase in investments due to amortization
of discounts, net of premiums (12,192) (11,153)
Decrease (Increase) in prepaid commissions 346 (59)
Decrease (Increase) in agents' advances, net of allowance 349 (2,604)
Decrease in accounts payable, accrued expenses,
and other liabilities (11,968) (10,126)
Other, net (264) 183
- - ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 43,728 32,967
- - ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of fixed maturities held to maturity -- (32,707)
Purchase of fixed maturities available for sale (52,608) --
Purchase of equity securities available for sale (294) (768)
Call of equity securities available for sale 1,198 --
Net change in office equipment and leasehold improvements (89) (396)
- - ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (51,793) (33,871)
- - ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings from bank 12,500 4,000
Repayment of borrowings from bank (1,000) --
Repayment of promissory note (6,000) --
Repurchase of Common Shares -- (1,384)
Reissuance of treasury shares 766 --
Payment of dividend (3,494) (3,147)
Principal payments for capital lease obligation (111) (108)
- - ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 2,661 (639)
- - ----------------------------------------------------------------------------------------------------------
Net decrease in cash (5,404) (1,543)
Cash at beginning of period 7,617 1,543
- - ----------------------------------------------------------------------------------------------------------
Cash at end of period $2,213 --
==========================================================================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-6-
<PAGE> 7
CAPITOL AMERICAN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
1. Basis of Presentation
---------------------
The unaudited condensed consolidated financial statements include
the accounts of Capitol American Financial Corporation ("Capitol
American") and all significant subsidiaries ("Company") including
Capitol American Life Insurance Company ("CALI"). The
accompanying unaudited condensed consolidated financial
statements of the Company have been prepared in accordance with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments, including normal recurring accruals, considered
necessary for fair presentation have been included. Operating
results for the three and six months ended June 30, 1996, are not
necessarily indicative of the results to be expected for the full
year.
2. Commitments and Contingencies
-----------------------------
On March 7,1995, CALI and the insurance regulatory authorities of
five states entered into a settlement agreement resolving all
issues involving the marketing and sales practices of the
Company's independent agents in those states, which had been the
subject of routine market conduct examinations. As of June 30,
1996, the Company has complied with certain provisions of the
settlement agreement. The Company expects the complete and
satisfactory implementation of the settlement provisions to be
completed in the latter part of 1996. The ultimate administrative
costs of complying and implementing the provisions of the
settlement agreement is not expected to have a material impact on
the financial position or results of operations of the Company.
In addition to the foregoing, the Company is involved in ordinary
litigation incidental to its business. Management does not
believe that the outcome of such litigation will have a material
adverse effect upon the results of operations or financial
condition of the Company.
- 7 -
<PAGE> 8
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- - -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Revenues
The following table sets forth the components of total revenues.
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Ended Six Months Ended
June 30, June 30,
- - -------------------------------------------------------------------------------------------------------------------
% %
1996 1995 Change 1996 1995 Change
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premiums earned $ 72,962 $ 69,940 4.3 $ 146,641 $ 138,980 5.5
Income from investments 13,852 11,910 16.3 27,247 23,329 16.8
Realized capital gains 32 -- -- 122 -- --
Other Income 7 21 (66.7) 24 43 (44.2)
- - -------------------------------------------------------------------------------------------------------------------
Total revenues $ 86,853 $ 81,871 6.1 $ 174,034 $ 162,352 7.2
===================================================================================================================
</TABLE>
Premiums earned increased by 4.3% and 5.5% for the three and six month
periods ended June 30, 1996, respectively, when compared with the same 1995
periods. Premiums earned are driven by two factors: renewal premiums and
premiums from new policy sales. Renewal premiums (premiums earned on policies
in-force longer than 12 months) increased by 8.2% and 8.8% for the three and
six-month periods ended June 30, 1996, respectively, when compared with the
same 1995 periods. The renewal rates for the three and six month periods ended
June 30, 1996 were 85.7% and 86.2%, respectively, compared with 85.3% and 85.2%
for the same 1995 periods. Premiums earned from new policies (policies in the
first year) declined by 10.3% and 7.1% for the three and six month periods
ended June 30, 1996, respectively.
Sales results for the three and six months ended June 30, 1996 are summarized
below.
<TABLE>
<CAPTION>
(Dollars in Thousands) Three Months Ended Six Months Ended
June 30, June 30,
- - -------------------------------------------------------------------------------------------------------------------
% %
1996 1995 Change 1996 1995 Change
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Business Marketing Division (BMD) $ 6,705 $ 6,393 4.9 $ 11,216 $ 11,984 (6.4)
Consumer Marketing Division (CMD) 8,262 10,547 (21.7) 16,274 20,969 (22.4)
- - -------------------------------------------------------------------------------------------------------------------
Total $ 14,967 $ 16,940 (11.6) $ 27,490 $ 32,953 (16.6)
===================================================================================================================
</TABLE>
Sale of new policies for the three and six months ended June 30, 1996,
decreased by 11.6% and 16.6%, respectively, from the same 1995 periods.
- 8 -
<PAGE> 9
Sales from BMD increased by 4.9% in the second quarter of 1996 over the
same 1995 period due to a 62.3% increase in sales from brokers. On a
year-to-date basis, BMD sales were 6.4% below the same 1995 period, primarily a
result of 6.8% decline in the number of producing agents.
Sales from CMD continue to be hampered by a decline in the Company's
largest sales organization, Inter-State Services ("ISS"). ISS, which has
historically accounted for approximately one-third of total Company sales,
experienced a 35.3% and a 33.4% decline in second quarter and first half of
1996 sales. The decline in ISS sales is primarily due to a 38.2% year-to-date
decrease in the number of producing agents. CMD sales excluding ISS were down
7.0% during the quarter and year-to-date were down 9.3%, primarily the result
of an 18.4% decline in the number of producing agents partially offset by an
11% increase in agent proficiency.
The increase in investment income, as shown in the table on the previous
page, was driven primarily by growth in the Company's investment portfolio. The
investable assets, including cash, increased by 9.5% from December 31, 1995, as
a result of cash flow from operations and the accretion of purchase discount on
zero coupon securities. The investment yield on average investable assets,
including cash, was 8.0% and 8.1% for the second quarter and first six months
of 1996, respectively, compared to 8.3% and 8.3% for the same 1995 periods. The
decrease in investment yield on average portfolio assets for 1996 is due to
lower interest rates generally available on new investments compared to yields
on investments made in prior years.
The Company's fixed income investment portfolio is comprised entirely of
U.S. government and corporate utility fixed income securities. The Company has
the intent and ability to hold to maturity all fixed income securities
currently classified in the held-to-maturity category. During the first half of
1996, the Company realized $122,000 in capital gains due to calls of preferred
stocks classified as available-for-sale.
On July 16, 1996, the Company's Board of Directors approved a change in
investment policy which will allow the Company to hold up to 50% of its
investment portfolio in non-U.S. Government securities, specifically investment
grade corporate fixed income securities.
- 9 -
<PAGE> 10
Benefits and Expenses
- - ---------------------
The following table sets forth the components and calculation of the
benefit ratio.
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Ended Six Months Ended
June 30, June 30,
- - -------------------------------------------------------------------------------------------------------------------
% of % of % of % of
1996 Revenues 1995 Revenues 1996 Revenues 1995 Revenues
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues $ 86,853 100.0 $ 81,871 100.0 $ 174,034 100.0 $ 162,352 100.0
- - -------------------------------------------------------------------------------------------------------------------
Claim benefits 15,168 17.5 15,880 19.4 31,924 18.2 31,208 19.2
Return-of-premium
settlements 4,396 5.1 3,282 4.0 8,298 4.8 5,957 3.7
- - -------------------------------------------------------------------------------------------------------------------
Policy benefits 19,564 22.6 19,162 23.4 40,022 23.0 37,165 22.9
Increase in future
policy benefits 20,449 23.5 18,887 23.1 40,897 23.5 38,080 23.4
- - -------------------------------------------------------------------------------------------------------------------
Total benefits and
benefit ratio $ 40,013 46.1 $ 38,049 46.5 $ 80,919 46.5 $ 75,245 46.3
===================================================================================================================
</TABLE>
The decrease in the benefit ratio for the second quarter of 1996 is
primarily due to lower claim benefit costs incurred and accelerated policy
terminations, as discussed in the following page, resulting in the release of
policyholder benefit reserves. The benefit ratio for the first half of 1996
increased slightly over the same 1995 period.
The interest rate used in discounting the provision for future policy
benefits for policies issued in 1996 is 8.20% compared to 8.40% for policies
issued in 1995, 8.75% for policies issued in 1994, 9.2% for policies issued in
1992 and 1993, and 11% for policies issued in 1981 through 1991. A reduction in
the discount rate, which is based on the yield of investments allotted to
certain sales, results in an increase in future policy benefits as a percent of
revenues. This applies only to new sales, as changes in interest rates do not
affect reserving on policies already in force.
- 10 -
<PAGE> 11
The following table sets forth the components and calculation of
the expense ratio.
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Ended Six Months Ended
June 30, June 30,
- - -------------------------------------------------------------------------------------------------------------------
% of % of % of % of
1996 Premiums 1995 Premiums 1996 Premiums 1995 Premiums
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums earned $ 72,962 100.0 $ 69,940 100.0 $ 146,641 100.0 $ 138,980 100.0
- - -------------------------------------------------------------------------------------------------------------------
Renewal commissions 10,654 14.6 10,245 14.7 21,433 14.6 20,356 14.7
Amortization of deferred
policy acquisition
costs 6,810 9.3 5,832 8.3 12,267 8.4 10,952 7.9
General and administrative
expenses excluding
compliance charges 8,239 11.3 8,117 11.6 16,730 11.4 16,797 12.1
Compliance charges -- -- -- -- -- -- 1,611 1.1
- - -------------------------------------------------------------------------------------------------------------------
Total expense and
expense ratio $ 25,703 35.2 $ 24,194 34.6 $ 50,430 34.4 $ 49,716 35.8
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
Renewal commissions remained essentially unchanged as a percentage of
premiums earned for the second quarter of 1996 and the first six months of 1996
when compared to the same 1995 periods.
Amortization of deferred policy acquisition costs, as a percentage of
premiums earned, increased by 1.0% to 9.3% in the second quarter of 1996 and
increased by 0.5% to 8.4% in the first half of 1996 over the same 1995 periods.
The increase in the amortization of deferred policy acquisition costs is a
result of acclerated policy terminations during the quarter. As expected, the
Company has experienced accelerated policy terminations primarily in its
Section 125 business and believes it is a direct result of a previous announced
agreement with the Internal Revenue Service regarding the Company's policies
under Section 125 of the Internal Revenue Code. As previously disclosed, on
October 2, 1995, the Company entered into an agreement with the IRS regarding
certain accident and health insurance policies issued to policyholders through
employer-sponsored plans that are intended to qualify as cafeteria plans under
Section 125 of the Internal Revenue Code. The IRS informally determined that
these policies do not qualify under Section 125 if they contain a provision
that permits the policyholder to receive back premiums after a specified period
of time. The Company has such provisions which it calls return-of-premium
("ROP"), cash value ("CV") or benefit builder riders. Beginning in 1996,
policyholders are no longer eligible to purchase or retain policies with the
ROP, CV, or benefit builder coverage within a cafeteria plan. Instead,
policyholders are required to either surrender the ROP, CV, or benefit builder
rider or pay for the policy outside of the cafeteria plan.
Policy terminations result in lower earned premiums, a write-off of
deferred policy acquisition costs, and a release of policyholder benefit
reserves. The Company may continue to experience a higher level of policy
terminations during the remainder of 1996 resulting from Section 125
policies being surrendered.
- 11 -
<PAGE> 12
General and administrative expenses, as a percentage of premiums earned,
decreased slightly in the second quarter of 1996 compared to the same 1995
period and decreased from 13.2% to 11.4% in the first half of 1996 compared to
the same 1995 period. The decrease in the general and administrative expense
ratio is due to the Company's continuing effort to reduce its cost structure.
In addition, the decrease through six months is partly a result of a $1,611,000
settlement of market conduct examinations in March of 1995. Excluding this
charge, first half of 1995 general and administrative expense would have been
12.1% of premiums earned, and the expense ratio would have been 34.7%.
Income Before Federal Income Taxes and Net Income
- - -------------------------------------------------
The following table sets forth the Company's income before income taxes,
and net income.
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Ended Six Months Ended
June 30, June 30,
- - -------------------------------------------------------------------------------------------------------------------
1996 1995 % Change 1996 1995 % Change
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before federal income taxes $ 20,587 $ 19,006 8.3 $ 41,641 $ 36,139 15.2
Federal income tax expense:
Current 6,137 4,866 26.1 10,035 10,688 6.1
Deferred 1,070 1,800 (40.6) 4,535 2,491 82.1
- - -------------------------------------------------------------------------------------------------------------------
Total federal income taxes $ 7,207 $ 6,666 8.1 $ 14,570 $ 13,179 10.6
- - -------------------------------------------------------------------------------------------------------------------
Net income $ 13,380 $ 12,340 8.4 $ 27,071 $ 22,960 17.9
===================================================================================================================
</TABLE>
The Company's effective federal income tax rates for the second quarter
and first six months of 1996 was 35.0% and 35.0 %, respectively, compared to
35.1% and 36.5% for the same 1995 periods, respectively.
Earnings per share for the second quarter and the first six months of
1996 totaled $0.77 and $1.55, respectively, an increase of 8.5 % and 18.3%
respectively, compared to $0.71 and $1.31 for the same 1995 periods. Earnings
per share for the first half of 1996 increased over the same 1995 period by
9.9%, excluding the effects of the market conduct settlement of $1,611,000
since the earnings per share would have been $1.41 for the six months ended
June 30, 1995.
- 12 -
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
Capitol American is a holding company which conducts its principal
operations through its insurance subsidiaries. As a holding company, Capitol
American's assets consist primarily of shares of Capitol American Life
Insurance Company ("CALI"), of which it is the sole shareholder. Capitol
American's cash outflows are comprised primarily of salaries, taxes, rent,
dividends, stock redemptions and debt service. These cash outflows are
dependent on the ability of the subsidiaries to pay cash dividends and
management fees to Capitol American. Therefore, Capitol American's liquidity
position is driven by the profitability, capital position and regulatory
dividend restriction of its subsidiaries, primarily CALI.
CALI's dividend capability is governed by the insurance laws of the state
of Arizona. During any rolling twelve-month period, CALI may pay dividends to
Capitol American without regulatory approval in the amount up to the lesser of
its prior-year statutory net gain from operations or 10% of its statutory
capital and surplus. In 1996, dividend payments by CALI in excess of $7,437,000
would require approval. Capitol American has paid dividends totaling $0.20 per
share to shareholders or a total of $3,494,000 in 1996 compared with $0.18 per
share or a total of $3,147,000 in 1995. During the second quarter of 1996 the
quarterly dividend payment to shareholders was $0.10 per share compared with
$0.09 per share in 1995.
On July 16, 1996, the Board of Directors announced a regular quarterly
dividend of $0.10 per share, payable on August 15, 1996, to shareholders of
records as of August 1, 1996.
Bank borrowing and short-term intercompany loans constitute other sources
of liquidity. Capitol American has a $50,000,000 revolving line of credit
secured by CALI's common stock. The revolving line of credit extends to
December 31, 1996, and at that date all revolving loans outstanding become due
and payable. Capitol American has the option, subject to bank approval, to
extend the revolving loans for one year to December 31, 1997. The revolving
credit agreement contains restrictive covenants which require Capitol American
and its subsidiaries to maintain a specified amount of net worth and statutory
surplus to meet certain financial ratios, restrict future indebtedness, and
restrict the investments the Company may make by limiting the types of
investments and amount of non-U.S. Government Securities. At June 30, 1996, and
December 31, 1995, Capitol American had an outstanding balance of $29,500,000
and $18,000,000, respectively, on the revolving line of credit. The increase in
the balance is primarly due to the Company retiring early the promissory note
of $6,000,000 of principal and $3,127,000 of accrued interest. In addition, the
increase in the balance was used to meet operating needs of the parent holding
company.
During 1993 and 1994, the Board of Directors adopted a common share
repurchase program. The program allowed the Company to repurchase, from time to
time, up to a total of 1,250,000 of its common shares. As of June 30, 1996, the
Company repurchased 1,067,300 shares at an average price per share of $21.35
under this program. During the first quarter of 1996, the Company reissued
34,900 shares from the treasury shares as a result of stock option exercises.
Repurchases have been funded by cash flows from operations and by bank
borrowings.
- 13 -
<PAGE> 14
PART II
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
================================================================================
At the Company's Annual Meeting of Shareholders held on May 9, 1996, the
following members were elected to the Board of Directors:
<TABLE>
<CAPTION>
Votes Votes
for Withheld
---------- --------
<S> <C> <C>
R. Hale Andrews, Jr. 15,231,233 67,235
Robert A. Garda 15,231,233 67,235
David H. Gunning 15,231,388 67,080
William H. Heller 15,231,433 67,035
M. Thomas Moore 15,231,533 66,935
Rowland T. Moriarty 15,231,333 67,135
Richard C. Osborne 15,231,533 66,935
Jon H. Outcalt 15,231,533 66,935
William R. Robertson 15,231,533 66,935
</TABLE>
- 14 -
<PAGE> 15
PART II
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
================================================================================
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the
quarter ended June 30, 1996.
- 15 -
<PAGE> 16
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.
CAPITOL AMERICAN FINANCIAL CORPORATION
Date: July 26, 1996 By /s/ David H. Gunning
------------------- -----------------------------
David H. Gunning
Chairman of the Board, President and
Chief Executive Officer
Date: July 26, 1996 By /s/ Ronald L. Sarosy
------------------- -----------------------------
Ronald L. Sarosy
Senior Vice President, Treasurer and
Chief Financial Officer
- 16 -
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 309,260
<DEBT-CARRYING-VALUE> 351,826
<DEBT-MARKET-VALUE> 448,852
<EQUITIES> 8,834
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 669,970
<CASH> 2,213
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 266,381
<TOTAL-ASSETS> 980,437
<POLICY-LOSSES> 512,599
<UNEARNED-PREMIUMS> 36,055
<POLICY-OTHER> 39,247
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 29,500
<COMMON> 57,495
0
0
<OTHER-SE> 236,792
<TOTAL-LIABILITY-AND-EQUITY> 980,437
146,641
<INVESTMENT-INCOME> 27,247
<INVESTMENT-GAINS> 122
<OTHER-INCOME> 24
<BENEFITS> 80,919
<UNDERWRITING-AMORTIZATION> 12,267
<UNDERWRITING-OTHER> 21,433
<INCOME-PRETAX> 41,641
<INCOME-TAX> 14,570
<INCOME-CONTINUING> 27,071
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,071
<EPS-PRIMARY> 1.55
<EPS-DILUTED> 1.55
<RESERVE-OPEN> 37,473
<PROVISION-CURRENT> 33,042
<PROVISION-PRIOR> (1,379)
<PAYMENTS-CURRENT> 9,963
<PAYMENTS-PRIOR> 19,926
<RESERVE-CLOSE> 39,247
<CUMULATIVE-DEFICIENCY> (1,379)
</TABLE>
