-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NLcgN0o1u6F1+8NUZ7DVj8TLl4m4fyc629Cc2ga0AqY4K1CIbVdkuJi1SYe9PoWJ 3Tr9f+5OVlwZ/2/cGRBnYw== 0000950152-96-001138.txt : 19960326 0000950152-96-001138.hdr.sgml : 19960326 ACCESSION NUMBER: 0000950152-96-001138 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960325 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL RESERVE LIFE CORP CENTRAL INDEX KEY: 0000215403 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 341017531 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-08483 FILM NUMBER: 96537903 BUSINESS ADDRESS: STREET 1: 17800 ROYALTON RD CITY: STRONGSVILLE STATE: OH ZIP: 44136 BUSINESS PHONE: 2165722400 10-K 1 CENTRAL RESERVE LIFE 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMM. FILE NO. 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 IDENTIFICATION NUMBER INCORPORATION OR ORGANIZATION) 17800 Royalton Road, Strongsville, Ohio 44136 --------------------------------------- --------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(216) 572-2400 ------------------------------------------------ (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Shares, without par value ------------------------------------- (TITLE OF CLASS) 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 / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates of the Registrant. $36,842,188 computed based on the closing price of the Common Shares on March 18, 1996. The number of Common Shares, without par value, outstanding as of March 18, 1996: 4,037,500. - -------------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE: Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 16, 1996, into Part III, Items 10, 11, 12, and 13. - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS Central Reserve Life Corporation (the "Registrant") was incorporated in 1964 as Citation Life Insurance Company under the laws of the State of Ohio. The present name was adopted in 1976. Unless the context indicates otherwise, the term "Company" as herein used will refer to Central Reserve Life Corporation only. The Company is a holding company conducting its business through several subsidiaries. More detailed information regarding the Company's subsidiaries is set forth below. (1) INSURANCE OPERATIONS The Company owns 100% of Central Reserve Life Insurance Company ("Central"), which is its principal operating subsidiary. Central is an Ohio domiciled Life and Accident and Health insurance company. Central was incorporated in 1963 and commenced business in 1965. The Company acquired Central in 1973. As of December 31, 1995, Central was licensed to transact business in Alabama, Arizona, Arkansas, Colorado, Delaware, Florida, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin and Wyoming (35 states). (2) OTHER OPERATIONS In March 1983, the Company acquired Western Reserve Administrative Services, Inc. ("Western"), an Ohio corporation which administers claims for self-insured companies. Western also administers Central's Gemini product which is a partially self-funded group plan for small companies. (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Effective December 31, 1995, the Company redefined its reporting segments, merging the group life and group accident and health segments together, as well as combining the life and annuity segments. These alignments fit the Company's current operating organization and produce three segments: group life and health; life insurance and annuities; and corporate and other. The following table presents the revenues and income (loss) on a GAAP basis for the last three years attributable to the Company's industry segments. The Company is not able to allocate investment assets or identifiable assets by industry segment.
1995 1994 1993 ------------ ------------ ------------ Revenues: Group Life and Health...................... $237,257,385 $228,313,768 $212,837,282 Life Insurance and Annuities............... 2,170,138 1,729,842 1,168,542 Corporate and Other........................ 381,571 157,601 805,603 ------------ ------------ ------------ $239,809,094 $230,201,211 $214,811,427 =========== =========== =========== Income (loss) before Federal income taxes: Group Life and Health...................... $ 6,180,636 $ 7,577,364 $ 3,918,302 Life Insurance and Annuities............... (241,685) (927,206) (553,163) Corporate and Other........................ 8,274 222,831 (260,600) ------------ ------------ ------------ $ 5,947,225 $ 6,872,989 $ 3,104,539 =========== =========== ===========
1 3 (c) NARRATIVE DESCRIPTION OF BUSINESS The operational aspects of the Company's business are primarily in Central; therefore, this section will contain information that only pertains to Central. (1) BUSINESS AND PRINCIPAL PRODUCT Products Central specializes in meeting the insurance needs of small to midsized businesses and individuals. Among the products Central offers are life insurance, annuities, accident and health insurance, long-term disability and short-term major medical. Central's principal product is group insurance, which accounted for about 98% of its premiums in 1995. Approximately 2% of the group premiums were for life insurance and 98% were for accident and health insurance. Central provides for its customers a comprehensive package of more than 25 managed care controls which help (a) keep insureds' out-of-pocket expenses down, (b) ensure affordability of the plans, and (c) keep rates attractive at renewal time. Among these managed care controls are hospital inpatient and outpatient billing review, independent utilization management, physician code review, hospital audit review, premium reduction renewal options, a hospice care program, and the National Physician Data Bank Review(SM), a refinement of Central's former reasonable and customary charge controls. Also included as a part of Central's managed care programs are Preferred Provider Organization (PPO) health plans which are available to both group and individuals. Through its PPO plans, Central is able to offer customers a network of hospitals and physicians that provide medical services at discounted rates. PPO networks which Central contracts with are situated in 16 states. For customers located outside the existing PPO service areas, Central offers a supplemental hospital program, through which it offers discounted hospital rates by contracting with national PPO networks. Marketing Central's products are marketed through the establishment of general agencies in Midwestern, Southeastern, and Southwestern states. Regional sales managers are responsible for recruiting and training the general agents. The general agents are required to recruit agents in their area, conduct seminars for the agents and train them in the benefits, underwriting requirements and general conditions under which Central's insurance plans operate. Central supports the general agents in the recruiting and training of agents through sales brochures and literature, assistance with seminars, and a video training program. Central enhances and enables the general agents' and writing agents' sales efforts through its Co-op Advertising Program, sales and promotional literature and various sales contests. Internally, Central's organization supports the agents and emphasizes customer service with a unique "team" approach. Organized around geographically dedicated groups of employees, each team consists of several specialists for each region. Underwriting Central controls the quality of its group accident and health business by maintaining specific underwriting standards and guidelines. Where not restricted by state regulatory agencies, Central medically underwrites each individual by requiring enrollment applications, medical health history questionnaires and, in some cases, medical records. While members of each group are individually underwritten, Central takes into account certain group characteristics, such as size, location and industry. For a discussion of certain business risks, other than underwriting, see Note 1 to the consolidated financial statements. 2 4 (2) INSURANCE VOLUME, POLICIES AND CERTIFICATES Although insurance volume (amount of life insurance) is generally a guide to statistical information for most insurance companies, policies and certificates in force are a more informative statistic for Central due to the large percent of business generated in the group accident and health area. Central requires each insured to carry group life insurance, but the average requirement is only $10,000, accordingly, it is more informative to focus on the number of certificates in force as opposed to volume of insurance. Following are tables reflecting statistical information on Central's business.
1995 1994 1993 -------------- -------------- -------------- LIFE INSURANCE VOLUME: Insurance Written..................... $ 467,588,000 $ 459,830,000 $ 517,829,000 In force.............................. $1,175,823,000 $1,012,860,000 $1,016,513,000 Reinsured............................. $ 50,751,000 $ 41,424,000 $ 13,608,000 GROUP POLICIES: Beginning of Year..................... 41,385 40,491 31,654 Issued during Year.................... 21,926 22,400 26,764 Terminations.......................... (21,427) (21,506) (17,927) -------------- -------------- -------------- End of Year........................... 41,884 41,385 40,491 ============= ============= ============= GROUP CERTIFICATES: Beginning of Year..................... 102,959 105,536 96,175 Issued during Year (new).............. 44,398 31,270 36,586 Terminations (net of additions)....... (33,637) (33,847) (27,225) -------------- -------------- -------------- End of Year........................... 113,720 102,959 105,536 ============= ============= =============
(3) GEOGRAPHIC DISTRIBUTION The geographic distribution of direct premiums and annuity considerations received (before reinsurance) by Central during 1995 is as follows:
PERCENT OF STATE AMOUNT TOTAL ----- ------------ ------------ Ohio.................................... $ 79,153,784 33.5% Indiana................................. 23,164,269 9.8 Arizona................................. 16,640,603 7.0 Michigan................................ 14,519,531 6.1 Colorado................................ 13,970,100 5.9 Tennessee............................... 12,008,647 5.1 Alabama................................. 11,999,140 5.1 Pennsylvania............................ 11,531,221 4.9 Virginia................................ 8,837,449 3.7 North Carolina.......................... 8,560,752 3.6 West Virginia........................... 8,411,565 3.6 Missouri................................ 8,202,333 3.5 Other................................... 19,330,053 8.2 ------------ ------ Total......................... $236,329,447 100.0% ============ ======
(4) AGENTS Central's insurance policies are sold by licensed agents and general agents (brokers). Regional Sales Managers service the brokers. Central does not have agents who sell exclusively for it. The licensed agents and brokers who produce insurance business for Central generally have affiliations with and serve in a similar capacity for one or more other companies which may be competitive with Central, and a portion of their business may be written by such other companies. Such agents and brokers are compensated by Central for business produced by them on a cash commission basis at rates which are believed to be competitive with those of other life insurance companies. As of December 31, 1995, Central had 81 brokers/general agents and 13,103 agents licensed. 3 5 (5) INVESTMENTS An important earnings factor for Central, as well as all insurance companies, is the income from the investment portfolio. The investment objectives for insurance companies are designed to maximize yields, preserve principal and maintain liquidity. Investments must comply with the insurance laws of the state of domicile. These laws prescribe the kind, quality and concentration of investments which may be made. Due to the restrictive nature of these laws, there may be occasions when Central may be precluded from making certain otherwise attractive investments. As of December 31, 1995, 99% of the $80,652,527 invested in fixed maturities, was of investment grade quality. Central and the Company do not invest in "junk" bonds or derivatives such as futures, forwards, swaps, and option contracts, and other financial instruments with similar characteristics. However, Central does invest in mortgage-backed securities of which some are collateralized mortgage obligations (CMO's). These investments, besides having a credit risk, also have the risk of prepayment, during rising interest rates, and the risk of extension during a decline in interest rates. Central constantly monitors these securities and has reduced its exposure in CMO's in 1995 by selling certain securities and investing the proceeds in short term maturities. The following tables show various aspects of the fixed maturities investment portfolio of the Company as of December 31, 1995:
CARRYING VALUE PERCENT ----------- -------- PORTFOLIO MATURITY Due in one year or less.......................................... $ 3,024,688 3.7% Due after one year through five years............................ 17,185,552 21.0 Due after five years through ten years........................... 26,567,888 32.5 Due after ten years.............................................. 3,231,876 3.9 ----------- 50,010,004 Mortgage-backed securities (5.2 average years)................... 31,817,051 38.9 ----------- -------- $81,827,055 100.0% =========== ========
CARRYING VALUE AMORTIZED FAIR ------------------------ COST VALUE AMOUNT PERCENT ----------- ----------- ----------- -------- PORTFOLIO DISTRIBUTION U.S. Treasury securities............ $17,995,752 $18,507,131 $18,452,254 22.6% U.S. Agencies....................... 2,498,844 2,506,085 2,506,085 3.1 Obligations of states, municipalities and political subdivisions..................... 1,671,612 1,710,484 1,710,484 2.1 Corporate bonds..................... 25,999,185 26,555,156 26,555,156 32.5 Convertible bonds................... 379,189 342,525 342,525 .4 Foreign bonds....................... 502,781 443,500 443,500 .5 Mortgage-backed securities: Federal Home Loan Mortgage....... 13,591,275 13,841,978 13,834,195 16.9 Federal National Mortgage........ 8,234,519 8,391,211 8,377,382 10.2 Other............................ 9,779,370 9,611,923 9,605,474 11.7 ----------- ----------- ----------- -------- $80,652,527 $81,909,993 $81,827,055 100.0% =========== =========== =========== ========
4 6
AMORTIZED COST PERCENT ----------- -------- QUALITY RATING Government....................................................... $17,995,752 22.3% Government Agencies.............................................. 24,324,639 30.1 Aaa.............................................................. 5,696,691 7.1 Aa............................................................... 4,881,702 6.1 A................................................................ 18,568,502 23.0 Baa.............................................................. 8,935,448 11.1 Ba............................................................... 104,920 .1 NR............................................................... 144,873 .2 ----------- -------- $80,652,527 100.0% =========== ========
(6) RESERVES Central is required by the insurance laws of the states in which it is licensed to set up statutory reserves to meet policy obligations on its ordinary life policies. These reserves are amounts which, with additions from premiums to be received and with interest on such reserves compounded annually at certain assumed rates, are calculated to be sufficient to meet policy obligations as they mature. The various actuarial factors are determined from mortality tables and interest rates in effect when the policy is issued. The ordinary life policies currently issued by Central are valued on the Commissioner's Standard Ordinary Table of Mortality of 1980 under the Commissioners' Reserve Valuation Method and the Net Level Premium Method. The guaranteed interest rate on policies currently being issued is 4.5%. On policies issued previously to the current series, guaranteed interest rates were as specified in the various policies and range from 2.5% to 6%. Under the Commissioners' Reserve Valuation Method, the amount of reserve provided in the first policy year is less than under the Net Level Premium Method, but in subsequent years greater additions to reserves are required. To the extent that the rate of income realized on investments is greater or less than the assumed interest rate used in the calculation of reserves, reported earnings are increased or decreased, as the case may be. The majority of Central's reserves and liabilities for claims, however, are for its group accident and health business. Statutory and regulatory requirements are generally less explicit for health insurance reserves and liabilities than for ordinary life insurance. For its group accident and health business Central establishes an Active Life Reserve plus a liability for due and unpaid claims, claims in course of settlement, and incurred but unreported claims as well as a reserve for the present value of amounts not yet due on claims. These reserves and liabilities are dependent upon many factors, such as economic and social conditions, inflation (overall and hospital costs specifically), changes in doctrines of legal liability and damage awards for pain and suffering. Therefore, the reserves and liabilities established are necessarily based on extensive estimates and prior years' statistics. (7) REINSURANCE As is customary among most insurance companies, Central reinsures portions of the life insurance policies it writes, thereby providing a greater diversification of risk and minimizing Central's exposure on major risks. While the effect of reinsurance is to lessen risks to the writing company, it may also lower income. Although the ceding of reinsurance does not discharge the original insurer from its primary liability to its policyholder, the insurance company that assumes the coverage assumes the related liability and becomes the ultimate source of payment. The maximum amount of exposure that Central retains on any life is $50,000 on ordinary life and $25,000 on group life on ages through 70. No retention is maintained over age 70. Maximum retention on impaired risks is $10,000. Central also has reinsurance on group accident and health claims. Effective January 1, 1995, Central's reinsurance treaty provides that all individual claims in excess of $500,000 are 100% reinsured. The overall effect of reinsurance is not material to the Company's financial condition. Reinsurance treaties in effect at December 31, 1995 were with The Cologne Life Reinsurance Company, Life ReAssurance Corporation of America and Business Men's Assurance Company. 5 7 (8) REGULATION Central, in common with other insurance companies operating in the states in which it is licensed, is subject to regulation and supervision by state insurance regulatory agencies. These regulatory bodies have broad administrative powers relating to standards of solvency, which must be met on a continuing basis, granting and revoking of licenses, licensing of agents, approval of policy forms, maintenance of adequate reserves, form and content of financial statements, types of investments permitted, issuance and sale of stock and other matters pertaining to insurance. Central is required to file detailed annual statements with the respective state regulatory bodies and is subject to periodic examination by the regulators. The most recent regulatory examination for Central was made as of December 31, 1992. The next examination is for the three year period ending December 31, 1995 and will begin in March 1996. (9) COMPETITION The insurance business is highly competitive. There are over 1,600 legal reserve life insurance companies in the United States, of which over 650 are operating in Ohio, Central's principal state of operation. Many of these have been in business for long periods of time, and have substantially greater financial resources, larger selling organizations and broader diversification of risks than Central. Many of these companies are mutual companies, whose earnings inure to the benefit of their policyholders. However, the Company believes that the policies and premium rates of Central are generally competitive with those offered by other companies selling similar types of insurance in Ohio. (10) EMPLOYEES As of December 31, 1995 Central had 510 employees. The Registrant has no employees of its own. (d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS The Company has no foreign operations. Its domestic operations during 1995 were primarily in Ohio. ITEM 2. PROPERTIES The Company owns its home office building, located at 17800 Royalton Road, Strongsville, Ohio. The building, which consists of 121,625 square feet of gross floor area, was occupied in late 1990 by the Company and all its subsidiaries. Central, the principal operating subsidiary, entered into a 15 year triple net lease agreement with the Company for 100% of the space. All operations are conducted in this building. As indicated in the Capital Resources section, of Item 7, the Company is planning an addition to the existing building, but no capital commitments have been made as of March 18, 1996. ITEM 3. LEGAL PROCEEDINGS Other than ordinary routine litigation incidental to the business, neither the Company nor any of its subsidiaries is party to any material pending legal proceeding nor is any of their property the subject thereof. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through the solicitation of proxies or otherwise. EXECUTIVE OFFICERS OF THE COMPANY AND CENTRAL Pursuant to Instruction 3 to Item 401(b) of Regulation S-K, the following information is reported below. 6 8 (a) The executive officers of the Company and Central are as follows:
NAME OF OFFICER EXECUTIVE OFFICER AGE POSITION SINCE - ----------------------- -------- ----------------------------------- ---------------- Fred Lick, Jr. 64 Chairman of the Board, 2/74 Chief Executive Officer, President and Director Frank W. Grimone 60 Executive Vice President, 5/74 Chief Financial Officer and Treasurer Glen A. Laffoon 56 Executive Vice President and Chief 12/74 Administrative Officer
The current one year terms of office of the executive officers listed above began May 18, 1995, with their election to office by the Board of Directors at its meeting following the annual meeting of shareholders held on such date. There are no arrangements or understandings known to the Company between any executive officer and any other person pursuant to which any officer was elected to office. There is no family relationship between any director or executive officer and any other director or executive officer of the Company. 7 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS (a) The Company's Common Shares are traded on the Nasdaq Stock Market tier of The Nasdaq Stock Market(SM) under the symbol CRLC. The following table shows the representative high and low prices of the Common Shares for the calendar quarters indicated. These prices were taken from the Nasdaq Monthly Statistical Reports.
HIGH LOW DIVIDENDS -------- -------- ------------ 1995 First Quarter............ $ 8 1/2 $7 1/8 $ .12 Second Quarter........... 8 1/4 7 1/8 .12 Third Quarter............ 10 7 5/8 .12 Fourth Quarter........... 10 8 3/4 .12 1994 First Quarter............ $ 8 $7 $ .11 Second Quarter........... 8 7/8 6 3/4 .11 Third Quarter............ 8 5/8 7 3/4 .11 Fourth Quarter........... 8 1/2 7 7/8 .11
(b) As of March 18, 1996, there were 1,687 record holders of the Common Shares. (c) The cash dividends paid by the Company in the past two years are indicated in the table above. The Company's present source of income, other than a nominal amount of investment income, is dividends and rent from Central. Central, the main operating subsidiary, is subject to certain restrictions which are contained in the Insurance Holding Company statute (Ohio Revised Code 3901.34) which prevent Central from paying the Company, without the approval of the Ohio Superintendent of Insurance, any dividend from other than earned surplus (as defined in the statute) or any dividend whose value, together with the value of other dividends paid or distributions made within the preceding 12 months, exceeds the greater of (i) 10% of Central's surplus as regards policyholders as of the December 31 next preceding the dividend payment, or (ii) the net income of Central for the 12-month period ended the December 31 next preceding the dividend payment. The Company believes it will be able to continue paying dividends. Payment, however, will be determined by the Company's Board of Directors based on an analysis of the Company's earnings, applicable regulatory restrictions, the competitive climate in which the Company operates, and other relevant considerations. 8 10 ITEM 6. SELECTED FINANCIAL DATA
1995 1994 1993 1992 1991 ------------ ------------ ------------ ------------ ------------ FOR THE YEAR: Premiums................. $233,168,529 $223,679,071 $208,730,840 $172,010,014 $140,982,753 Net Investment Income.... 6,454,038 6,515,927 5,367,184 4,606,036 4,481,145 Gain (loss) on Sale of Investments............ 149,527 (23,024) 707,741 514,679 165,416 Other Income............. 37,000 29,237 5,662 1,697 33,060 ------------ ------------ ------------ ------------ ------------ Total Revenues........... $239,809,094 $230,201,211 $214,811,427 $177,132,426 $145,662,374 =========== =========== =========== =========== =========== Income before Federal Income Taxes........... $ 5,947,225 $ 6,872,989 $ 3,104,539 $ 3,489,636 $ 4,217,522 Federal Income Taxes (Benefit).............. 1,442,618 2,059,228 714,190 (34,581) 1,118,577 Cumulative effect of Statement 109 as of January 1, 1991........ -- -- -- -- 170,669 ------------ ------------ ------------ ------------ ------------ Net Income............... $ 4,504,607 $ 4,813,761 $ 2,390,349 $ 3,524,217 $ 2,928,276 =========== =========== =========== =========== =========== Net Income Per Share..... $1.07 $1.14 $ .57 $ .85 $ .71 Cash Dividends Per Share.................. $ .48 $ .44 $ .40 $ .36 $ .32 AT YEAR END: Investments.............. $ 91,310,781 $ 83,230,323 $ 79,030,628 $ 59,305,499 $ 44,645,676 Total Assets............. $117,329,039 $107,944,158 $103,613,338 $ 85,028,970 $ 69,921,639 Mortgage Note Payable.... $ 8,599,067 $ 8,685,754 $ 8,764,615 $ 8,836,356 $ 8,904,022 Future Policy Benefits and Claims Payable..... $ 65,317,522 $ 62,716,877 $ 56,148,504 $ 38,836,847 $ 28,931,749 Retained Earnings........ $ 27,030,102 $ 24,463,447 $ 21,422,301 $ 20,640,995 $ 18,553,097 Shareholders' Equity..... $ 33,300,980 $ 24,530,732 $ 26,856,896 $ 26,015,001 $ 23,798,571 Equity Per Share: After net unrealized holding gain (loss).............. $8.25 $6.08 $6.67 $6.49 $6.00 Before net unrealized holding gain (loss).............. $8.06 $7.42 N/A N/A N/A
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION LIQUIDITY: Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its financial commitments. The major needs for cash for the Company are Central Reserve Life Insurance Company's (Central) ability 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. 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. See Item 5. The majority of the Company's assets are in investments which were $91,310,781, after a net unrealized holding gain of $1,174,528, before taxes, (see below), or 78% of the total assets at December 31, 1995. Fixed 9 11 maturities are the primary investment of the Company and were $81,827,055 or 90% of total investments at December 31, 1995. The Company is carrying fixed maturities of $11,995,728 at amortized cost (held to maturity) and fixed maturities of $69,831,327 at fair value (available for sale) at December 31, 1995. The Company does not hold any so-called "junk" bonds or what are generally considered high-yield type securities, and 99% of the bonds are of investment grade quality. In accordance with SFAS 115, the Company recorded an increase in investments of $1,174,528 to reflect the reporting of investments classified as available for sale at fair value (estimated market value) which was higher than amortized cost. The credit is reflected in shareholders' equity as a "net unrealized holding gain". In addition to the fixed maturities, the Company also had $5.2 million in unrestricted cash and $9.4 million in short term investments at December 31, 1995. Central also has an unused $1 million line of credit with a major bank. During 1995, total assets increased about $9.3 million, or 9% to $117,329,038, mainly due to a positive cash flow from operations during the year from premiums, investment income and the $1,174,528 net unrealized holding gain. Liabilities accrued for future policy benefits and policy claims payable increased 4%, or about $2.6 million to $65,317,522 primarily because of a strengthening of reserves and increased premiums. Shareholders' equity increased $8,770,248 after paying dividends of $1,937,952 and an increase of $6,202,243 for a net unrealized holding gain. CAPITAL RESOURCES: The only long-term debt the Company has at December 31, 1995, is $8,599,067, which is the principal amount payable under a loan secured by a mortgage on the Company's home office building. The Company entered into the loan agreement in 1990 for $9 million for a term of 10 years bearing interest at 9 1/2% per annum with a 30 year amortization period payment schedule. At the same time, the Company also entered into a 15 year lease agreement with Central for 100% of the space. The Company will use the monthly rental payments to pay, among other expenses, the required mortgage loan payments. In 1995, the Company started a search for a new computer system for claims and administration which includes, among other things, billing, rating and commission functions. The increase in the Company's business, new state mandates and new products have created the need for this new system. A system of this nature is expected to cost between $5 million and $7 million, including software, hardware and implementation, over an estimated three year period. The Company estimates these costs could be recovered over a 4 to 5 year period, through a combination of payroll cost savings, expense controls and new production capacity. The Company has not entered into any contract or commitment for the purchase of such a computer system, although such an acquisition is planned for 1996. In light of the Company's growth over the last several years, the Company is also planning an addition to its existing headquarters building. The addition would provide space for training, Managed Care and computer facilities. The preliminary plans indicate an estimated cost between $6 million and $7 million however, the Company has not made any capital commitment with respect to the addition as of March 18, 1996. RESULTS OF OPERATIONS: 1995 compared to 1994 During 1995, premiums increased 4% to $233,168,529 from $223,679,071 in 1994. The increase was primarily in the group life and health division which accounted for about 98% of total premiums. Group certificates in force increased about 10% to 113,720 in 1995 from 102,959 in 1994. Certificates issued for new group policies were 44,398 in 1995, up 42%, from 31,270 in 1994. The increase came primarily from a new product, the Professional Multi-Option (PMO), which was introduced in late 1994 and targets small businesses with 2 to 25 lives. Total lapses (net of additions/decreases) in 1995 were 33,637, down slightly from 33,847 in 1994. Overall, the lapse ratio was in line with the Company's expectations and was lower than the industry average for small group business. Not included in premiums, for generally accepted accounting principles (GAAP) purposes, were annuity considerations in the amounts of $3,498,442 and $3,492,402 for 1995 and 1994. Net investment income decreased about 1% to $6,454,038 in 1995 from $6,515,927 in 1994. The decrease was primarily due to the overall decrease in interest rates during 1995. Also, during 1995 the Company 10 12 reduced its holdings in mortgage-backed securities and convertible bonds. The proceeds were invested in short term government type securities at lower interest rates, but produced a more liquid and stable position. Benefits and claims incurred expenses increased 7% in 1995 to $165,472,603 from $155,257,560 in 1994. This compares to a 6% increase in 1994 over 1993. The incurred loss ratio was 71% for 1995 and 69.4% for 1994. The major increase in claims was during the last quarter, primarily the last month. The loss ratio increased to 73.6% for the fourth quarter of 1995 compared to 67.7% in the same quarter in 1994. During the fourth quarter the Company experienced, as many small group carriers did, an increase in claims due to utilization, state mandates and accidents. This trend continued into January 1996. In response, the Company has increased premium rates, not renewed certain blocks of business and is updating several managed care controls. Commissions decreased slightly to $33,411,203 in 1995 from $33,573,278 in 1994 and were 14.3% of premiums in 1995 compared to 15% in 1994. The decrease is attributed to a lower commission rate for the new product (PMO) sold in 1995 and the growth in renewal premiums which carry a lower commission rate. Expenses, such as salaries, premium taxes, fees, etc., increased, in total, 1% in 1995 over 1994. However, as a percentage of premiums the ratio was lower in 1995, 15.0% compared to 15.4% in 1994. Net income tax as a percentage of pretax income was 24% in 1995 compared to 30% in 1994. The current portion of the tax decreased to $1,419,026 in 1995 from $1,535,817 in 1994. The main reason for the decrease was the decrease in pretax income. The decrease in the deferred tax expense is primarily due to the change in the valuation allowance due to an unrealized holding gain in 1995 compared to an unrealized holding loss in 1994. Net income for 1995 was $4,504,607 or $1.07 per share compared to $4,813,761 or $1.14 per share in 1994. The decrease is primarily due to the increase in the benefit loss ratio to 71% from 69.4% and a 1% decrease in investment income for the year. Because group accident and health represents 98% of Central's business, a higher loss ratio from this division has a negative effect on the Company's earnings. The statutory loss ratio in the group accident and health division increased to 69.4% in 1995 from 67.9% in 1994. 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, qualified as a life company, for tax purposes. The Company is vigorously protesting the proposed deficiency and management believes existing law supports the Company's position. Therefore, the Company has not recorded a liability for the difference. If the IRS were to pursue litigation and prevail in its position that Central no longer qualifies as a life company for tax purposes, Federal income taxes would increase in the future. Presently, as a small life company, Central is permitted, among other things, a deduction from the first $3 million of income of 60% or $1.8 million. As Central's income increases above $3 million, the special deduction is reduced proportionately. Besides relying on favorable existing case law, Central may have, under certain circumstances, the ability to change and market policies that could insure its qualification as a life company for tax purposes in the future, if the need arises. RESULTS OF OPERATIONS: 1994 compared to 1993 During 1994, premiums increased 7% to $223,679,071 from $208,730,840 in 1993. The increase was primarily in the group division which accounted for about 99% of total premiums. Group certificates in force decreased to 102,959 in 1994 from 105,536 in 1993. Certificates issued for new group policies were 31,270 in 1994, down from 36,586 in 1993. Management believes that the health care reform bill activity in 1994 caused many policyholders to remain with their existing coverage and others not to seek new coverage. Also certain new state mandates curtailed some sales in some states, until the Company made certain adjustments to comply with those mandates. Total lapses (net of additions/decreases) in 1994 were 33,847 compared to 11 13 27,225 in 1993. The increase is due to a combination of certain groups that were not renewed and the continued higher lapses in an association type product which is being used as a short term policy. Not included in premiums, for generally accepted accounting principles (GAAP) purposes, are annuity considerations in the amounts of $3,492,402 and $8,728,902 for 1994 and 1993. The decrease in annuity considerations was primarily due to increasing interest rates available in other investments. Net investment income increased 21% to $6,515,927 from $5,367,184 in 1993. Favorable cash flows in 1994 and 1993 aided in the increase in investments, primarily fixed maturities which generated the majority of the investment income. Offsetting the effect of the increase in investments was the effect of lower interest rates during the first half of 1994. Benefits and claims incurred expenses increased 6% in 1994 to $155,257,560 from $146,017,738 in 1993. This compares to a 28% increase in 1993 over 1992. The incurred loss ratio was 69.4% in 1994 and 69.9% in 1993. The improvement can be attributed to managed care cost controls, certain rate adjustments, reduction in large claims and an overall moderation in the medical inflation rate for 1994. Commissions increased 5% to $33,573,278 in 1994 from $32,120,808 in 1993 and were 15% of premiums in 1994 compared to 15.4% in 1993. The decrease in the ratio is primarily due to the increase in renewal premiums, which carry a lower commission than new business. Expenses increased 3% in 1994 over 1993 and were 15.4% of premiums compared to 16.1% in 1993. Net income tax expense as a percentage of pretax income was 30% in 1994 compared to 23% in 1993. The current portion of the tax, increased to $1,534,817 from $769,833 in 1993. The main reason for the increase in current taxes is the increase in pretax income. The increase in the deferred tax expense is primarily due to the increase in the valuation allowance. Since the Company's recovery rates for prior years were lower than current tax rates a higher valuation allowance is required. Also in the valuation allowance is $1,845,199 recorded directly to shareholders' equity for the net unrealized holding loss, offsetting the same amount shown as a deferred tax asset. Net income for 1994 was $4,813,761 or $1.14 per share compared to $2,390,349 or $.57 per share in 1993. The increase is primarily due to a 21% increase in investment income, slightly lower benefit loss ratio of 69.4% compared to 69.9% in 1993 and a decrease in the ratio of operating expenses to premiums from 16.1% to 15.4%. Because group accident and health represents 97% of Central's business, investment income and a lower loss ratio from this division has a positive effect on the Company's earnings. Along with an increase in investment income in the group accident and health division, the statutory loss ratio decreased to 67.9% in 1994 from 69.5% in 1993. 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 decreased. 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. LEGISLATIVE DEVELOPMENTS: It appears that no major Federal health care reform is scheduled to take effect in 1996. However, incremental changes such as portability and limited pre-existing conditions, are probable and even more likely to be enacted on the state level. The Company cannot predict the ultimate timing or effect of any legislative efforts, and no assurance can be given that any such efforts will not have a material adverse effect on the Company's business and results of operations. 12 14 NEW ACCOUNTING STANDARDS: In December 1991, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures about Fair Value of Financial Instruments". The statement requires disclosure about the fair value of financial instruments and was adopted by the Company in 1995. In October 1994, the FASB issued SFAS 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments". This statement requires disclosure about derivative financial instruments and amends existing requirements of SFAS Nos. 105 and 107. SFAS 119 is effective for financial statements issued for fiscal years ending after December 15, 1995, for entities with less than $150 million in total assets. However, as of December 31, 1995, the Company does not own nor has it purchased any derivatives as defined in SFAS 119. In 1995, the Company adopted SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions." The focus of SFAS 106 is principally on postretirement health care benefits and the effect on the consolidated financial statements is discussed in the notes to the consolidated financial statements. In March 1995, FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The statement is effective for fiscal years beginning after December 15, 1995. Previously issued consolidated financial statements will not be restated. The Company will adopt SFAS 121 in 1996 and the impact on the consolidated financial statements of adopting SFAS 121 is not expected to be material. In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". The Company did not grant any of its shares of stock or other equity instruments to employees in 1995 and therefore has not adopted SFAS 123 as of December 31, 1995. 13 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA CENTRAL RESERVE LIFE CORPORATION INDEX
PAGE ---- Independent Auditors' Report.................................... 15 Consolidated Balance Sheets as of December 31, 1995 and 1994.... 16 Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993.............................. 17 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993........................ 18 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993.......... 19 Notes to Consolidated Financial Statements for the years ended December 31, 1995, 1994 and 1993........................ 20 Schedule I -- Summary of Investments -- Other than Investments in Related Parties............................................ 35 Schedule II -- Condensed Financial Information of Registrant -- Central Reserve Life Corporation (Parent Only)......................................................... 36 Schedule III -- Supplementary Insurance Information............. 39 Schedule IV -- Reinsurance...................................... 40
14 16 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Central Reserve Life Corporation: We have audited the consolidated financial statements of Central Reserve Life Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Central Reserve Life Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Columbus, Ohio February 28, 1996 15 17 CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994 ================================================================================
1995 1994 ------------ ------------ ASSETS Investments (Note 2): Fixed maturities held to maturity, at amortized cost....... $ 11,995,728 $ 13,468,956 Fixed maturities available for sale, at fair value......... 69,831,327 67,409,309 ------------ ------------ Total fixed maturities........................... 81,827,055 80,878,265 Policy loans............................................... 106,441 101,146 Short-term investments, at cost which approximate market... 9,377,285 2,250,912 ------------ ------------ Total investments................................ 91,310,781 83,230,323 Cash (Note 2)................................................ 9,102,020 7,654,487 Accrued investment income.................................... 973,380 1,315,937 Premiums receivable.......................................... 1,853,105 1,656,225 Property and equipment, at cost, net of accumulated depreciation of $6,660,708 and $5,642,595, respectively (Note 1)................................................... 11,635,993 12,053,737 Deferred federal income taxes (Note 5)....................... 512,350 935,282 Federal income taxes recoverable............................. 326,380 245,406 Other assets................................................. 1,615,030 852,761 ------------ ------------ $117,329,039 $107,944,158 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Policy liabilities and accruals: Future policy benefits, losses and claims.................. $ 30,192,055 $ 27,496,885 Other policy claims and benefits payable (Note 3).......... 35,125,467 35,219,992 Other policyholders' funds................................. 5,222,968 5,751,966 Other liabilities.......................................... 4,888,502 6,258,829 ------------ ------------ 75,428,992 74,727,672 Mortgage note payable (Note 6)............................... 8,599,067 8,685,754 ------------ ------------ Total liabilities................................ 84,028,059 83,413,426 ------------ ------------ Commitments and contingencies (Notes 5, 7, 8 and 9) Shareholders' equity: (Notes 4 and 10) Non-Voting Preferred shares, no par value, authorized 2,000,000 none issued................................... -- -- Common shares, no par value, stated value $.50, authorized 10,000,000, issued and outstanding 4,037,500 in 1995 and 4,037,300 in 1994 (322,770 are reserved for options).... 2,018,750 2,018,650 Additional paid-in capital................................. 3,476,940 3,475,690 Net unrealized holding gain (loss)......................... 775,188 (5,427,055) Retained earnings.......................................... 27,030,102 24,463,447 ------------ ------------ Total shareholders' equity....................... 33,300,980 24,530,732 ------------ ------------ $117,329,039 $107,944,158 =========== ===========
See accompanying notes to consolidated financial statements. 16 18 CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 ================================================================================
1995 1994 1993 ------------ ------------ ------------ Revenues: Premiums....................................... $233,168,529 $223,679,071 $208,730,840 Net investment income (Note 2)................. 6,454,038 6,515,927 5,367,184 Net realized gains (losses) (Note 2)........... 149,527 (23,024) 707,741 Other income................................... 37,000 29,237 5,662 ------------ ------------ ------------ 239,809,094 230,201,211 214,811,427 ------------ ------------ ------------ Benefits, losses and expenses: Benefits, claims, losses and settlement expenses.................................... 165,472,603 155,257,560 146,017,738 Commissions.................................... 33,411,203 33,573,278 32,120,808 Salaries and benefits.......................... 15,066,432 14,387,949 14,025,177 Taxes, licenses and fees....................... 5,541,570 5,296,613 5,168,061 Other operating expenses....................... 13,548,624 13,983,649 13,538,631 Interest expense............................... 821,437 829,173 836,473 ------------ ------------ ------------ 233,861,869 223,328,222 211,706,888 ------------ ------------ ------------ Income before Federal income taxes............... 5,947,225 6,872,989 3,104,539 Federal income tax expense (Note 5).............. 1,442,618 2,059,228 714,190 ------------ ------------ ------------ Net income (Note 4).............................. $ 4,504,607 $ 4,813,761 $ 2,390,349 =========== =========== =========== Net income per share (Note 1).................... $ 1.07 $ 1.14 $ .57 ======= ======= =======
See accompanying notes to consolidated financial statements. 17 19 CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 ================================================================================
NET UN- REALIZED ADDITIONAL GAIN COMMON PAID-IN (LOSS) ON RETAINED SHARES CAPITAL INVESTMENTS EARNINGS ----------- ----------- ----------- ----------- Balance, December 31, 1992................... $ 2,004,101 $ 3,369,905 $ -- $20,640,995 Cash dividends ($.40 per share)............ -- -- -- (1,609,043) Net income................................. -- -- -- 2,390,349 Exercise of stock options (Note 10)........ 8,090 52,499 -- -- ----------- ----------- ----------- ----------- Balance, December 31, 1993................... 2,012,191 3,422,404 -- 21,422,301 Cash dividends ($.44 per share)............ -- -- -- (1,772,615) Net income................................. -- -- -- 4,813,761 Exercise of stock options (Note 10)........ 6,459 53,286 -- -- Adjustment for change in accounting for fixed maturities at January 1, 1994, net of deferred tax of $601,224............. -- -- 1,167,080 -- Change in net unrealized holding loss, net of deferred tax benefit of $601,224..... -- -- (6,594,135) -- ----------- ----------- ----------- ----------- Balance, December 31, 1994................... 2,018,650 3,475,690 (5,427,055) 24,463,447 Cash dividends ($.48 per share)............ -- -- -- (1,937,952) Net income................................. -- -- -- 4,504,607 Exercise of stock options (Note 10)........ 100 1,250 -- -- Change in net unrealized holding gain, net of deferred tax liability of $399,340... -- -- 6,202,243 -- ----------- ----------- ----------- ----------- Balance, December 31, 1995................... $ 2,018,750 $ 3,476,940 $ 775,188 $27,030,102 ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 18 20 CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 ================================================================================
1995 1994 1993 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income..................................... $ 4,504,607 $ 4,813,761 $ 2,390,349 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization............. 1,111,718 974,410 1,168,324 Net realized (gains) losses............... (149,527) 23,024 (707,741) Deferred federal income taxes............. 23,592 524,411 (55,693) Changes in assets and liabilities: Premiums receivable.................... (196,880) 253,071 715,915 Federal income taxes recoverable....... (80,974) 100,044 769,883 Accrued investment income.............. 342,557 (306,827) (478,481) Other assets........................... (762,269) (68,187) 646,701 Future policy benefits, claims and funds payable........................ (558,269) 3,421,129 7,519,405 Other liabilities...................... (1,370,327) 385,691 631,010 ----------- ----------- ----------- Net cash provided by operating activities........................... 2,864,228 10,120,527 12,599,672 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net additions to furniture and equipment....... (738,537) (461,773) (361,576) Net proceeds (purchase) of investments -- short-term.................................. (7,126,373) 4,249,097 (500,009) Purchase of investments -- fixed maturities held to maturity............................ -- (1,354,688) -- Purchase of investments -- fixed maturities available for sale.......................... (15,995,248) (28,293,915) -- Purchase of investments........................ -- -- (40,866,696) Policy loans................................... (5,295) (9,168) (2,648) Proceeds from sale, call or maturity of fixed maturities available for sale............... 20,368,903 12,746,906 5,693,954 Proceeds from calls/maturity of fixed maturities held to maturity................. 1,473,228 3,451,020 16,918,316 ----------- ----------- ----------- Net cash used in investing activities........................... (2,023,322) (9,672,521) (19,118,659) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in annuity contract liabilities... 2,629,916 2,929,025 8,993,293 Principal payments on long-term debt........... (86,687) (78,861) (71,741) Proceeds from exercise of stock options........ 1,350 59,745 60,589 Dividends...................................... (1,937,952) (1,772,615) (1,609,043) ----------- ----------- ----------- Net cash provided by financing activities........................... 606,627 1,137,294 7,373,098 ----------- ----------- ----------- Net increase in cash................... 1,447,533 1,585,300 854,111 Cash at beginning of year........................ 7,654,487 6,069,187 5,215,076 ----------- ----------- ----------- Cash at end of year.............................. $ 9,102,020 $ 7,654,487 $ 6,069,187 ========== ========== ========== Supplemental disclosures of cash flow information: Cash paid during the year for interest......... $ 821,437 $ 829,173 $ 836,473 Cash paid during the year for income taxes..... $ 1,500,000 $ 1,434,773 $ --
See accompanying notes to consolidated financial statements. 19 21 CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 ================================================================================ NOTE 1 -- SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies followed by the Company that materially affect financial reporting are summarized below. The accompanying financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) which differ from statutory accounting practices prescribed or permitted by regulatory authorities (see Note 4). (a) CONSOLIDATION POLICY The consolidated financial statements include the accounts of Central Reserve Life Corporation (Company) and its wholly-owned subsidiaries, Central Reserve Life Insurance Company (Central), Western Reserve Administrative Services, Inc. (Western) and CRL Asset Management Corporation (AMC). All significant intercompany accounts and transactions have been eliminated in consolidation. (b) DESCRIPTION OF BUSINESS Central is a life and accident and health insurer licensed in 35 states. Central principally sells group insurance, however, it offers a full range of life, health, and annuity products through general agents and independent writing agents and is subject to competition from other insurers throughout the United States. Central is subject to regulation by the insurance department of states in which it is licensed, and undergoes periodic examinations by those departments. The following is a description of certain risks facing life and accident and health insurers and how Central mitigates those risks: Legal/Regulatory Risk is the risk that, changes in the legal or regulatory environment in which an insurer operates, will create additional expenses not anticipated by the insurer in pricing its products. That is, regulatory initiatives designed to reduce insurer profits or otherwise affecting the industry in which the insurer operates, new legal theories or insurance company insolvencies through guaranty fund assessments, may create costs for the insurer beyond those recorded in the financial statements. Central attempts to mitigate this risk by offering a wide range of products and by operating in 35 states, thus reducing its exposure to any single product or non-Federal jurisdiction, and also by employing underwriting practices which identify and minimize the adverse impact of this risk. It appears that no major Federal health care reform will take place in 1996. However, incremental changes are more probable than major changes and it is more likely this will be on the state level than Federal. The Federal government has already enacted a series of health care mandates which has resulted in cost shifting from the Federal government to state government and the private sector. The Company cannot predict the ultimate timing or effect of such legislative efforts, and no assurance can be given that any such efforts will not have a material adverse effect on the Company's business and results of operations. Credit Risk is the risk that issuers of securities owned by Central will default or that other parties, including reinsurers that have obligations to Central, will not pay or perform. Central attempts to minimize this risk by adhering to a conservative investment strategy and by maintaining sound reinsurance and credit and collection policies. Interest Rate Risk is the risk that interest rates will change and cause a decrease in the value of an insurer's investments. This change in rates may cause certain interest-sensitive products to become uncompetitive or may cause disintermediation. Central attempts to mitigate this risk by charging fees for non-conformance with certain policy provisions and/or by attempting to match the maturity schedule of 20 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994 AND 1993 ================================================================================ its assets with the expected payouts of its liabilities. To the extent that liabilities come due more quickly than assets mature, an insurer would have to sell assets prior to maturity and recognize a gain or loss. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and revenues and expenses for the reporting period. Actual results could differ significantly from those estimates. The estimates susceptible to significant change are those used in determining the liability for future policy benefits, losses and claims. Although some variability is inherent in these estimates, management believes the amounts provided are adequate. (c) INVESTMENTS Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". SFAS 115 requires that investments in all debt securities and those equity securities with readily determinable market values be classified into one of three categories: held to maturity, trading or available for sale. Classification of investments is based upon management's current intent. Debt securities which management has a positive intent and ability to hold until maturity are classified as securities held to maturity and are carried at amortized cost. Unrealized holding gains and losses on securities held to maturity are not reflected in the consolidated financial statements. Debt and equity securities that are purchased for short-term resale are classified as trading securities. Trading securities are carried at market value, with unrealized holding gains and losses included in earnings. All other debt and equity securities not included in the above two categories are classified as securities available for sale. Securities available for sale are carried at market value, with unrealized holding gains and losses reported as a separate component of shareholders' equity, net of tax. At December 31, 1995 the Company did not have any investments classified as trading securities. (d) DEFERRED POLICY ACQUISITION COSTS Certain costs, principally commissions, which vary with and are directly related to the production of ordinary life business, have been deferred. The deferred costs are being amortized through the use of factors over the benefit period of the related policies. These factors were developed using assumptions which are consistent with those used in setting rates. Due to the nature of the business and its persistency experience, the Company does not defer acquisition costs for Central's group business. Deferred policy acquisition costs at December 31, 1995 and 1994 were $209,760 and $149,926, respectively. The net amounts amortized to income were $59,834 in 1995, $60,116 in 1994 and $16,849 in 1993. (e) PROPERTY AND EQUIPMENT Included in the $11.6 million for property and equipment is approximately $10 million (net of depreciation) for the home office, of which $1.4 million is for land. Depreciation for the building is primarily over 31.5 years, except for certain components which will be over 15 years. The straight-line method is used. Other property and equipment, primarily furniture, fixtures and data processing equipment, is carried at cost less allowances for depreciation and amortization. Depreciation is computed on the straight-line method over the estimated useful lives of the equipment, principally five and seven years. (f) POLICY RESERVES Liabilities for future policy benefits on ordinary life insurance have generally been provided on a net-level premium method based upon estimates of future investment yield, mortality and withdrawals using Central's 21 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994 AND 1993 ================================================================================ experience and actuarial judgement with an allowance for possible unfavorable deviation from the expected experience. The Company amortizes deferred costs of all ordinary life policies for Central over the benefit period. The liability for future policy benefit reserves has been computed using the following assumptions: (1) The guaranteed interest rate on policies currently being issued is 4.5%. (2) Estimates of future mortality and withdrawals are based on experience and established industry tables. (g) LIFE AND ACCIDENT AND HEALTH CLAIM RESERVES The liabilities for unpaid accident and health and death claims are estimated principally based upon past experience for pending, incurred but not reported, and reopened claims. The liability includes a provision for the estimated cost of investigating and settling the claim liability. The liability is particularly sensitive to recent claims frequency and severity experience of Central. Management believes the liabilities for unpaid claims are adequate. A consulting actuary is retained by Central to assist in the estimation process and to certify to the statutory reserves. (h) RECOGNITION OF PREMIUM REVENUES AND BENEFITS Life premiums are recognized as revenues as they become due. Benefits and expenses are reported in a manner which results in the recognition of profits over the life of the policy. Such recognition is accomplished through the provision of liabilities for future benefits over the life of the contract and the amortization of acquisition costs over the benefit period. Accident and health insurance premiums are recognized as revenue over the terms, principally monthly, of the policies. Policy claims are charged to expense in the period that the claims are incurred. Contracts that do not subject Central to risks arising from policyholder mortality or morbidity are referred to as investment contracts. Certain deferred and flexible annuities are considered investment contracts. Amounts received as payments for such contracts are accounted for as deposits and included in future policy benefits, losses and claims. (i) EARNINGS PER SHARE Net income per share is computed using the weighted average number of common shares outstanding. The number of shares was increased to reflect shares issuable on the exercise of options, reduced by the number of shares assumed to have been purchased with the proceeds from the exercise of these common stock equivalents. The number of shares used to calculate the earnings per share was 4,221,636 in 1995, 4,201,069 in 1994 and 4,182,384 in 1993. (j) FEDERAL INCOME TAXES The Company follows SFAS No. 109, "Accounting for Income Taxes". Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. 22 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994 AND 1993 ================================================================================ NOTE 2 -- CASH AND INVESTMENTS The following is the breakdown of net investment income by category of investments for the years ending December 31:
1995 1994 1993 ---------- ---------- ---------- Fixed maturities................... $5,570,307 $5,931,835 $4,920,894 Policy loans....................... 5,517 5,065 4,768 Short-term investments............. 683,170 553,140 440,147 Other.............................. 195,044 25,887 1,375 ---------- ---------- ---------- $6,454,038 $6,515,927 $5,367,184 ========= ========= =========
Realized gains and losses are summarized as follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 1995 1994 1993 --------- ---------- ---------- Realized gains: Fixed maturities............................... $ 203,502 $ 236,385 $ 754,980 --------- ---------- ---------- Realized losses: Fixed maturities............................... 52,462 127,601 47,239 Equipment...................................... 1,513 131,808 -- --------- ---------- ---------- Total losses........................... 53,975 259,409 47,239 --------- ---------- ---------- Net realized gains (losses)...................... $ 149,527 $ (23,024) $ 707,741 ======== ========= =========
The amortized cost and fair value of securities held to maturity and available for sale as of December 31, 1995 are as follows. The estimated fair value is based on quoted market prices, where available, or on values obtained from independent pricing services.
DECEMBER 31, 1995 ---------------------------------------------------- UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING ESTIMATED COST GAINS LOSSES FAIR VALUE ----------- ----------- ---------- ----------- Held to maturity: U.S. Treasury securities......... $ 7,583,168 $ 84,155 $ (29,278 ) $ 7,638,045 Mortgage-backed securities: Federal Home Loan Mortgage.................... 2,900,327 10,939 (3,156 ) 2,908,110 Federal National Mortgage..... 1,356,316 13,829 -- 1,370,145 Other......................... 155,917 6,449 -- 162,366 ----------- ----------- ---------- ----------- Total held to maturity... $11,995,728 $ 115,372 $ (32,434 ) $12,078,666 ========== ========== ========= ==========
23 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994 AND 1993 ================================================================================
DECEMBER 31, 1995 ---------------------------------------------------- UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING ESTIMATED COST GAINS LOSSES FAIR VALUE ----------- ----------- ---------- ----------- Available for sale: U.S. Treasury securities......... $10,412,584 $ 456,502 $ -- $10,869,086 U.S. Agencies.................... 2,498,844 7,241 -- 2,506,085 Obligations of states, municipalities and political subdivisions.................. 1,671,612 38,996 (124) 1,710,484 Corporate bonds.................. 25,999,185 942,926 (386,955) 26,555,156 Convertible bonds................ 379,189 1,705 (38,369) 342,525 Foreign bonds.................... 502,781 -- (59,281) 443,500 Mortgage-backed securities: Federal Home Loan Mortgage.................... 10,690,948 252,974 (10,054) 10,933,868 Federal National Mortgage..... 6,878,203 153,776 (10,913) 7,021,066 Other......................... 9,623,453 177,535 (351,431) 9,449,557 ----------- ----------- ---------- ----------- Total available for sale................... $68,656,799 $ 2,031,655 $(857,127) $69,831,327 ========== ========== ========= ==========
The amortized cost and estimated fair value of securities held to maturity and available for sale as of December 31, 1994 are as follows. The fair value is based on quoted market prices, where available, or on values obtained from independent pricing services.
DECEMBER 31, 1994 ---------------------------------------------------- UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING ESTIMATED COST GAINS LOSSES FAIR VALUE ----------- ---------- ----------- ----------- Held to maturity: U.S. Treasury securities.......... $ 8,901,299 $ 53,311 $ (711,900) $ 8,242,710 Mortgage-backed securities: Federal Home Loan Mortgage..................... 2,899,219 -- (341,719) 2,557,500 Federal National Mortgage...... 1,354,688 -- (161,888) 1,192,800 Other.......................... 313,750 14,854 (1,929) 326,675 ----------- ---------- ----------- ----------- Total held to maturity.... $13,468,956 $ 68,165 $(1,217,436) $12,319,685 ========== ========= ========== ==========
24 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994 AND 1993 ================================================================================
DECEMBER 31, 1994 ---------------------------------------------------- UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING ESTIMATED COST GAINS LOSSES FAIR VALUE ----------- ---------- ----------- ----------- Available for sale: U.S. Treasury securities.......... $ 9,215,421 $ 21,899 $ (305,973) $ 8,931,347 Obligations of states, municipalities and political subdivisions................... 1,250,018 4,697 (111,623) 1,143,092 Corporate bonds................... 25,598,088 19,889 (2,474,687) 23,143,290 Convertible bonds................. 2,008,831 50,121 (72,351) 1,986,601 Foreign........................... 503,133 -- (72,683) 430,450 Mortgage-backed securities: Federal Home Loan Mortgage..................... 13,382,043 6,862 (708,647) 12,680,258 Federal National Mortgage...... 9,812,126 -- (868,467) 8,943,659 Other.......................... 11,066,704 23,935 (940,027) 10,150,612 ----------- ---------- ----------- ----------- Total available for sale.................... $72,836,364 $127,403 $(5,554,458) $67,409,309 ========== ========= ========== ==========
The proceeds, gross realized gains and gross realized losses from the sale (excluding calls, maturities and pay downs) of fixed maturities available for sale during each year were as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------- 1995 1994 1993 ----------- ---------- ---------- Proceeds......................................... $13,537,157 $1,820,867 $5,693,954 Gross realized gains............................. 179,825 124,067 388,026 Gross realized losses............................ 48,854 87,428 23,375 ========== ========= =========
The amortized cost and estimated fair value of fixed maturities at December 31, 1995, by contractual maturity, are as follows. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
DECEMBER 31, 1995 --------------------------- AMORTIZED FAIR COST VALUE ----------- ----------- Held to maturity: Due after one year through five years................. $ 6,560,182 $ 6,626,015 Due after five years through ten years................ 1,022,986 1,012,030 ----------- ----------- 7,583,168 7,638,045 Mortgage-backed securities (5.7 average years)........ 4,412,560 4,440,621 ----------- ----------- Total held to maturity........................ $11,995,728 $12,078,666 ========== ==========
25 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994 AND 1993 ================================================================================
DECEMBER 31, 1995 --------------------------- AMORTIZED FAIR COST VALUE ----------- ----------- Available for sale: Due in one year or less............................... $ 2,971,347 $ 3,024,688 Due after one year through five years................. 10,379,387 10,625,370 Due after five years through ten years................ 25,103,634 25,544,902 Due after ten years................................... 3,009,827 3,231,876 ----------- ----------- 41,464,195 42,426,836 Mortgage-backed securities (5.1 average years)........ 27,192,604 27,404,491 ----------- ----------- Total available for sale...................... $68,656,799 $69,831,327 ========== ==========
At December 31, 1995 cash includes approximately $3.1 million held for self-funded accident and health accounts, which is restricted as to its use. A corresponding amount is included in liabilities in the accompanying consolidated financial statements. At December 31, 1995 Central had certificates of deposit and fixed maturities on deposit with various state insurance departments, carried at $3,392,004, for the protection of policyholders. At December 31, 1995, short term investments include a repurchase agreement with a carrying value of $400,000. The repurchase agreement is collateralized by U. S. Treasury Notes and Bonds with a market value in excess of $400,000. NOTE 3 -- LIABILITY FOR OTHER POLICY CLAIMS AND BENEFITS PAYABLE The following table reflects the activity in the liability for Other Policy Claims and Benefits Payable, including the claims adjustment expenses (CAE) as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Balance at beginning of year........... $ 35,219,992 $ 32,003,500 $ 25,288,000 Incurred claims and CAE for: Current year...................... 161,454,853 153,942,398 142,012,399 Prior years....................... 225,632 (2,407,635) (212,850) ------------ ------------ ------------ Total incurred............... 161,680,485 151,534,763 141,799,549 ------------ ------------ ------------ Paid claims and CAE, net of reinsurance, for: Current year...................... 126,329,386 118,722,406 110,008,899 Prior years....................... 35,445,624 29,595,865 25,075,150 ------------ ------------ ------------ Total paid................... 161,775,010 148,318,271 135,084,049 ------------ ------------ ------------ Balance at end of year................. $ 35,125,467 $ 35,219,992 $ 32,003,500 =========== =========== ===========
NOTE 4 -- DIVIDEND RESTRICTION AND STATUTORY FINANCIAL INFORMATION At December 31, 1995, $27,477,972 of consolidated shareholders' equity represents net assets of the Company's insurance subsidiary which is subject to certain regulatory restrictions on paying dividends and making loans or advances to the parent company. Generally, the net assets of the Company's insurance subsidiary available for transfer to the parent company are limited to the amounts by which the insurance subsidiary's net assets, as determined in accordance with statutory accounting practices, exceed minimum statutory requirements. In addition, payments of such amounts as dividends are subject to approval by 26 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994 AND 1993 ================================================================================ regulatory authorities when (i) any such dividend is proposed to be paid from other than earned surplus (as defined in the applicable statute) or (ii) the value of any such dividend, together with the value of other dividends paid or distributions made within the preceding 12 months, exceeds the greater of (a) ten percent of the insurer's surplus as regards policyholders as of the 31st day of December next preceding the dividend payment, or (b) the net income of such insurer for the 12-month period ended the December 31st next preceding the dividend payment. Shareholders' capital and surplus and net income as determined in accordance with statutory accounting practices for Central differ from GAAP. Following is a reconciliation showing those differences.
YEARS ENDED DECEMBER 31, ------------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Statutory capital and surplus of insurance subsidiary................................. $27,477,972 $25,098,580 $21,548,063 Shareholders' equity of non-insurance subsidiaries............................... 2,399,919 2,257,634 2,247,673 Add (deduct): Net unrealized holding gain (loss)......... 775,188 (5,427,055) -- Deferred policy acquisition costs.......... 209,760 149,926 89,810 Policyholder reserve adjustments........... (333,383) (429,487) (503,102) Asset valuation and interest maintenance reserve................................. 1,220,336 1,129,787 1,062,554 Non-admitted assets and other adjustments, net..................................... 1,038,838 816,065 952,205 Deferred Federal income taxes.............. 512,350 935,282 1,459,693 ----------- ----------- ----------- Shareholders' equity per accompanying consolidated financial statements............. $33,300,980 $24,530,732 $26,856,896 ========== ========== ==========
YEARS ENDED DECEMBER 31, ------------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Statutory net income of insurance subsidiary................................. $ 4,569,765 $ 4,989,122 $ 2,685,908 Net income (loss) of non-insurance subsidiaries............................... (220,452) 222,831 (260,601) Adjustments to restate to the basis of generally accepted accounting principles: Increases (decreases): Policyholder reserves................. 96,104 73,615 (609,386) Deferred Federal income tax expense (benefit).......................... (23,592) (524,411) 55,693 Deferred policy acquisition costs..... 59,834 60,116 72,961 Net change in interest maintenance reserve............................ 22,948 (7,512) 445,774 ----------- ----------- ----------- Net income per accompanying consolidated financial statements....................... $ 4,504,607 $ 4,813,761 $ 2,390,349 ========== ========== ==========
Central's statutory accounting practices are all prescribed by the Ohio Department of Insurance. In December 1992, the National Association of Insurance Commissioners (NAIC) adopted the Life Risk-Based Capital (RBC) formula. This model act requires every life and health insurer to calculate its total adjusted capital and RBC requirement, and provides for an insurance commissioner to intervene if the insurer experiences financial difficulty. The formula includes components for asset risk, liability risk, interest rate exposure and other factors. The RBC requirement is for statutory financial statements and was effective 27 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994 AND 1993 ================================================================================ December 31, 1993. The model act was adopted in Ohio, Central's state of domicile, in 1995. Based upon the December 31, 1995 statutory financial statements, Central exceeded all the required RBC levels. NOTE 5 -- FEDERAL INCOME TAXES The Company files a consolidated Federal income tax return with its subsidiaries. The provision for Federal income tax does not bear the customary relationship to pretax accounting income because of special tax provisions available to life insurance companies. Central receives a benefit provided for "small" life insurance companies. Under the Life Insurance Company Income Tax Act of 1959, a portion of insurance companies' net income, prior to 1984, is not subject to Federal income taxes (within certain limitations) until it is distributed to stockholders, at which time it is taxed at regular corporate rates. For Federal income tax purposes, this untaxed income is accumulated in a memorandum account designated "policyholders' surplus". The accumulated untaxed policyholders' surplus for Central is $2,869,768. Federal income tax expense is composed of the following:
YEARS ENDED DECEMBER 31, ------------------------------------------ 1995 1994 1993 ---------- ---------- ---------- Current.................................. $1,419,026 $1,534,817 $ 769,883 Deferred................................. 23,592 524,411 (55,693) ---------- ---------- ---------- $1,442,618 $2,059,228 $ 714,190 ========= ========= =========
Income tax expense attributable to income from operations differs from the amounts computed by applying the U.S. Federal income tax rate of 35%. Those effects are as follows:
1995 1994 1993 ---------- ---------- ---------- Computed "expected" tax expense.......... $2,081,529 $2,405,546 $1,086,589 Special life insurance deduction......... (486,193) (458,228) (590,004) Tax exempt interest...................... (13,206) (21,589) (50,006) Change in the beginning-of-the-year balance of the valuation allowance for deferred tax assets allocated to income tax expense............................ (187,513) 397,127 12,000 Tax rate differential.................... (59,472) (68,730) (31,046) Accrual adjustment....................... 46,026 25,636 237,812 IRS audit adjustment..................... -- 215,303 -- Alternative minimum tax.................. -- (300,060) 48,845 Other.................................... 61,447 (135,777) -- ---------- ---------- ---------- $1,442,618 $2,059,228 $ 714,190 ========= ========= =========
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, qualified as a life company, for tax purposes. The Company intends to vigorously protest 28 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994 AND 1993 ================================================================================ the proposed deficiency and management believes existing law supports the Company's position. Therefore, the Company has not recorded a liability for the difference. If the IRS were to pursue litigation and prevail in its position that Central no longer qualifies as a life company for tax purposes, Federal income taxes would increase in the future. Presently, as a small life company, Central is permitted, among other things, a deduction from the first $3 million of income of 60% or $1.8 million. As Central's income increases above $3 million, the special deduction is reduced proportionately. Besides relying on favorable existing case law, Central may have, under certain circumstances, the ability to change and market policies that could insure its qualification as a life company for tax purposes in the future, if the need arises. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 and 1994 are presented below:
1995 1994 ---------- ---------- Deferred tax assets: Deferred acquisition costs.......................... $ 666,210 $ 899,219 Net unrealized holding loss......................... -- 1,845,199 Difference in reserves established for financial statement purposes and those for income tax purposes......................................... 722,530 884,145 Other............................................... 87,035 22,100 ---------- ---------- Gross deferred tax assets...................... 1,475,775 3,650,663 Less valuation allowance....................... (314,614) (2,347,326) ---------- ---------- Net deferred assets......................... 1,161,161 1,303,337 ---------- ---------- Deferred tax liabilities: Net unrealized holding gain......................... 399,340 -- Bond discount accretion............................. 74,636 76,223 Difference in book and tax depreciation............. 47,034 150,940 Other............................................... 127,801 140,892 ---------- ---------- Gross deferred tax liabilities 648,811 368,055 ---------- ---------- Deferred tax asset............................. $ 512,350 $ 935,282 ========= =========
The Company establishes a valuation allowance based on its analysis (scheduling) of future deductible amounts. A valuation allowance is currently established to the extent future deductible amounts cannot offset future taxable amounts or recover Federal income taxes paid within the statutory carryback period. Fluctuation in the valuation allowance is attributed to changes in the effect of the small life insurance company deduction and to a 100% valuation allowance on the deferred tax benefits on the net unrealized holding loss at December 31, 1994 and no valuation allowance applicable to the deferred tax expense on the net unrealized holding gain at December 31, 1995. NOTE 6 -- MORTGAGE NOTE PAYABLE The Company executed a note payable, in December 1990, for $9,000,000 bearing interest at 9 1/2% per annum for 10 years. The Company received $8,500,000 of the funds in December 1990 and the remaining $500,000 in December 1991. The mortgage note is collateralized by the home office building and by an assignment of the tenant lease for the building. The Company has been required to make monthly payments, since January 1991, based on a 30 year amortization schedule, of $75,677 for 10 years. After five years, the 29 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994 AND 1993 ================================================================================ Company has the right to prepay the loan with a 3% prepayment fee. Principal payments due in the next five years, assuming no prepayments, are $95,291 in 1996, $104,748 in 1997, $115,145 in 1998, $126,572 in 1999 and $139,134 in 2000. NOTE 7 -- LEASES Central has operating leases for certain computer processing equipment and laser printing, publishing equipment which expire at various dates through 2000. Charges for the leases were $1,069,723, $854,358 and $533,329 for 1995, 1994 and 1993, respectively. Future net minimum payments for the operating leases are as follows:
YEARS ENDING DECEMBER 31, COMPUTER LASER TOTAL - ------------------------------ -------- -------- ---------- 1996.......................... $415,301 $144,720 $ 560,021 1997.......................... 206,320 144,720 351,040 1998.......................... 20,368 144,720 165,088 1999.......................... 1,524 144,720 146,244 2000.......................... -- 24,120 24,120 -------- -------- ---------- $643,513 $603,000 $1,246,513 ========= ======== =========
NOTE 8 -- EMPLOYMENT CONTRACT The Company's employment agreement with its Chief Executive Officer was entered into in 1982 and amended in 1983. The agreement expires December 31, 2001 and calls for annual increases of 11% per year through 1996. The 1995 compensation under the agreement was $871,166. The agreement has a change of control provision, which if exercised, upon such a change would require a lump sum payment for the unexpired term. NOTE 9 -- COMMITMENTS AND CONTINGENCIES In the ordinary course of business, Central cedes reinsurance to other insurers. These arrangements limit the maximum net policy benefit potential on individual risks. Although the ceding of reinsurance does not discharge the original insurer from its primary liability to its policyholders, the insurance company that assumes the coverage also assumes the related liability. The maximum amount of exposure that Central retains on any life is $50,000 on ordinary life and $25,000 on group life on ages through 70. No retention is maintained over age 70. Maximum retention on impaired risks is $10,000. Central also has reinsurance on group accident and health claims. Effective January 1, 1995, Central's reinsurance treaty provides that all individual claims in excess of $500,000 are 100% reinsured. The overall effect of reinsurance is not material to the Company's financial condition. Reinsurance treaties in effect at December 31, 1995 were with The Cologne Life Reinsurance Company, Life ReAssurance Corporation of America and Business Men's Assurance Company. Central has a $1 million line of credit with a major bank, which was unused as of December 31, 1995 and 1994. The Company is involved in litigation and may become involved in potential litigation arising in the ordinary course of business. In the opinion of management, the effects, if any, of such litigation are not expected to be material to the Company's consolidated financial condition. 30 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994 AND 1993 ================================================================================ NOTE 10 -- STOCK OPTIONS AND STOCK ISSUED Outstanding stock options consist of options granted by the Company at prices equal to or above market price on the date of grant. On March 15, 1983, an Incentive Stock Option Plan was adopted. The plan, which expired in May 1993, provided that key full-time employees of the Company and its subsidiaries were eligible for participation in the Plan. Also 300,000 options were granted to the CEO in 1984, expiring in 1997, of which 255,000 at $2.83 per share remain outstanding at December 31, 1995. No options are available for future grants. The following table summarizes data regarding all stock options:
1995 1994 1993 ------------ ------------ ------------ Number of shares subject to options: Outstanding at beginning of year............. 325,970 355,670 299,150 Granted................................... -- -- 76,700 Expired/cancelled......................... (3,000) (16,782) (4,000) Exercised................................. (200) (12,918) (16,180) ------------ ------------ ------------ Outstanding at end of year................... 322,770 325,970 355,670 =========== =========== =========== Price range of options exercised............. $ 6.75 $ 2.83-$6.75 $ 2.83-$6.75
The exercise price of options outstanding at December 31, 1995, were $2.83 and $6.75 per share and those options expire in 1997 and 1998. NOTE 11 -- PREFERRED SHARES The Company has authorized 2,000,000 Non-Voting Preferred Shares, without par value. The Company has never issued any Non-Voting Preferred Shares, however, the Board of Directors is authorized at any time to provide for the issuance of, such shares in one or more series, and to determine the designations, preferences, limitations and other rights of the shares issued. Holders of Non-Voting Preferred Shares shall have no voting rights except as required by law. For each series, the Board of Directors shall determine, prior to the issuance of any shares thereof, the designations, preferences, limitations and relative or other rights thereof, including but not limited to the dividend rate, liquidation price, redemption rights and price, sinking fund requirements, conversion rights and restrictions on the issuance of such shares. NOTE 12 -- PENSION PLAN The Company adopted a noncontributory pension plan in 1978. The plan is a defined contribution money purchase pension plan with an outside company, covering substantially all full-time employees of age 20 1/2 or more who have completed six months or more of service. Participants in the plan begin vesting after two years of service and are fully vested after seven years. The contribution was approximately $1,137,000 for 1995, $1,013,000 for 1994 and $1,000,000 for 1993. NOTE 13 -- OTHER BENEFIT PLANS In addition to the Company's defined contribution pension plan, the Company, beginning in 1995, sponsors a retiree health benefit program for certain officer-class employees who meet specified age and service criteria. The Company and, as applicable, eligible retirees, fund the payment of benefits under the program in amounts and at such times as claims are incurred. Benefits for under age 65 retirees are based on continuation of prevailing active employee health coverage, and for over age 65 retirees are based on reimbursement of expenses for Medicare Part B and a Medicare Supplement Insurance Policy. The Company and, as applicable, eligible retirees, fund the payment of benefits under the program in amounts and at such times as premium payments or reimbursement of premium payments are incurred. 31 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994 AND 1993 ================================================================================ The program's net periodic postretirement benefit cost for the reported period is as follows:
1995 -------- Service Cost............................ $ 44,000 Interest Cost........................... 38,000 Amortization of Transition Obligation... 24,000 -------- Total......................... $106,000 ========
The program's funded status as of the reported date is as follows:
DECEMBER 31, 1995 ------------ Accumulated Postretirement Benefit Obligation (APBO): Retirees.............................. -- Fully Eligible Actives................ $ (156,000) Other Actives......................... (354,000) ------------ Total APBO.................... (510,000) Assets.................................. -- Unrecognized Prior Service Cost......... -- Unrecognized Net Gain................... (46,000) Transition Obligation................... 450,000 ------------ Prepaid/(Accrued) Cost.................. $ (106,000) ============
The assumed annual health care cost trend rate used to measure the expected cost of benefits under the program is initially 10%, declining by approximately 1% per annum to an ultimate assumed trend rate of 5% in the year 2003. The assumed health care cost trend rates have a significant effect on determining the cost of benefits provided under the program. The effect of a 1% increase in the health care cost trend rates as noted above would be an increase of $18,000 or 22% in the service and interest cost components of net periodic benefit cost for the period reported, and an increase of $98,000 or 19% in the accumulated postretirement benefit obligation amount as of the date reported. The discount rate used to measure the program's obligations was 7%. 32 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994 AND 1993 ================================================================================ NOTE 14 -- FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Effective December 31, 1995, the Company redefined its reporting segments, merging the group life and group accident health segments together, as well as combining the life and annuity segments. These alignments fit the Company's current operating organization and produce three segments: group life and health; life insurance and annuities; and corporate and other. The following table presents the revenues and income (loss), on a GAAP basis, attributable to the Company's consolidated industry segments. The Company is not required to allocate investment assets or identifiable assets by industry segments.
1995 1994 1993 ------------ ------------ ------------ Revenues: Group Life and Health.............. $237,257,385 $228,313,768 $212,837,282 Life Insurance and Annuities....... 2,170,138 1,729,842 1,168,542 Corporate and Other................ 381,571 157,601 805,603 ------------ ------------ ------------ $239,809,094 $230,201,211 $214,811,427 =========== =========== =========== Income (loss) before Federal income taxes: Group Life and Health.............. $ 6,180,636 $ 7,577,364 $ 3,918,302 Life Insurance and Annuities....... (241,685) (927,206) (553,163) Corporate and Other................ 8,274 222,831 (260,600) ------------ ------------ ------------ $ 5,947,225 $ 6,872,989 $ 3,104,539 =========== =========== ===========
NOTE 15 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 (SFAS 107) "Disclosures about Fair Value of Financial Instruments" requires disclosure of fair value information about existing on and off-balance sheet financial instruments. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Although fair value estimates are calculated using assumptions that management believes are appropriate, changes is assumptions could cause these estimates to vary materially. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in the immediate settlement of the instruments. SFAS 107 excludes certain assets and liabilities from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The tax ramifications of the related unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. The following methods and assumptions were used by the Company in estimating its fair value disclosures: INVESTMENT SECURITIES: Fair value for fixed maturity securities is based on quoted market prices, where available. For fixed maturity securities not actively traded, fair value is estimated using values obtained from independent pricing services or, in the case of private placements, is estimated by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investments. CASH, SHORT-TERM INVESTMENTS, PREMIUMS RECEIVABLE AND POLICY LOANS: The carrying amount reported in the balance sheets for these instruments approximate their fair value. 33 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED DECEMBER 31, 1995, 1994 AND 1993 ================================================================================ ANNUITY POLICIES: The fair value for the annuity reserves is the amount payable on demand. OTHER POLICYHOLDERS' FUNDS: The carrying amount reported in the consolidated balance sheets for these instruments approximate their fair value. MORTGAGE NOTE PAYABLE: The carrying amount reported in the consolidated balance sheets for the mortgage note payable approximates its fair value. Carrying amount and estimated fair value of financial instruments subject to SFAS 107 are as follows as of December 31:
1995 1994 ------------------------- ------------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ----------- ----------- ----------- ----------- ASSETS Investments: Fixed maturities held to maturity......... $11,995,728 $12,078,666 $13,468,956 $12,319,685 Fixed maturities available for sale....... 69,831,327 69,831,327 67,409,309 67,409,309 Policy loans.............................. 106,441 106,441 101,146 101,146 Short-term investments.................... 9,377,285 9,377,285 2,250,912 2,250,912 Cash........................................ 9,102,020 9,102,020 7,654,487 7,654,487 Premiums receivable......................... 1,853,105 1,853,105 1,656,225 1,656,225 LIABILITIES Annuity reserves............................ $21,511,411 $20,984,000 $18,883,495 $18,326,392 Other policyholders' funds.................. 5,222,968 5,222,968 5,751,966 5,751,966 Mortgage note payable....................... 8,599,067 8,599,067 8,685,754 8,685,754
NOTE 16 -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of quarterly results of operations for the years ended December 31, 1995 and 1994.
1ST 2ND 3RD 4TH ----------- ----------- ----------- ----------- 1995 Revenues................................ $58,675,479 $59,458,791 $60,176,963 $61,497,861 Benefits and expenses................... 57,099,579 57,569,824 58,092,593 61,099,873 Net income.............................. 1,100,900 1,289,967 1,272,370 841,370 Earnings per share...................... .26 .31 .30 .20 ========== ========== ========== ==========
1ST 2ND 3RD 4TH ----------- ----------- ----------- ----------- 1994 Revenues................................ $58,426,647 $56,678,300 $58,015,367 $57,080,897 Benefits and expenses................... 57,022,839 54,849,263 55,911,317 55,544,803 Net income.............................. 1,010,742 1,111,313 1,468,890 1,222,816 Earnings per share...................... .24 .26 .35 .29 ========== ========== ========== ==========
34 36 SCHEDULE I CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1995 ================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D - ---------------------------------------------------------------------------------------------- AMOUNT ON BALANCE TYPE OF INVESTMENT COST VALUE SHEET - --------------------------------------------------------------------------------------------- FIXED MATURITIES -- HELD TO MATURITY U.S. Treasury securities..................... $ 7,583,168 $ 7,638,045 $ 7,583,168 Mortgage-backed securities................... 4,412,560 4,440,621 4,412,560 FIXED MATURITIES -- AVAILABLE FOR SALE U.S. Treasury securities..................... 10,412,584 10,869,086 10,869,086 Obligations of states, municipalities and political subdivisions..................... 4,170,456 4,216,569 4,216,569 Corporate bonds.............................. 25,999,185 26,555,156 26,555,156 Convertible bonds............................ 379,189 342,525 342,525 Foreign bonds................................ 502,781 443,500 443,500 Mortgage-backed securities................... 27,192,604 27,404,491 27,404,491 ----------- ----------- ----------- Total fixed maturities..................... 80,652,527 $81,909,993 81,827,055 ----------- =========== ----------- Policy loans................................. 106,441 106,441 Short-term investments....................... 9,377,285 9,377,285 ----------- ----------- Total investments.......................... $90,136,253 $91,310,781 ========== ==========
See accompanying independent auditors' report. 35 37 SCHEDULE II CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT CENTRAL RESERVE LIFE CORPORATION (PARENT ONLY) BALANCE SHEETS ================================================================================
DECEMBER 31, --------------------------- 1995 1994 ----------- ----------- ASSETS Investments in subsidiaries*............................... $31,430,682 $22,375,551 Property and equipment..................................... 9,943,485 10,385,537 Cash....................................................... 305,011 261,544 Other...................................................... 238,108 217,684 ----------- ----------- $41,917,286 $33,240,316 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Accounts payable......................................... $ 17,239 $ 23,830 Mortgage note payable.................................... 8,599,067 8,685,754 ----------- ----------- TOTAL LIABILITIES................................... 8,616,306 8,709,584 ----------- ----------- Shareholders' equity: Common stock............................................. 2,018,750 2,018,650 Paid-in capital.......................................... 3,476,940 3,475,690 Net unrealized holding gain (loss)....................... 775,188 (5,427,055) Retained earnings........................................ 27,030,102 24,463,447 ----------- ----------- 33,300,980 24,530,732 ----------- ----------- $41,917,286 $33,240,316 ========== ========== - --------------- *Eliminated in consolidation.
See accompanying independent auditors' report. 36 38 SCHEDULE II CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT CENTRAL RESERVE LIFE CORPORATION (PARENT ONLY) STATEMENTS OF INCOME ================================================================================
YEARS ENDED DECEMBER 31, ---------------------------------------- 1995 1994 1993 ---------- ---------- ---------- Revenues: Dividend from subsidiaries*................ $1,900,000 $1,500,000 $1,331,250 Inter-company fees*........................ 1,170,000 1,434,000 1,170,000 Other investment income.................... 25,000 28,718 -- ---------- ---------- ---------- 3,095,000 2,962,718 2,501,250 ---------- ---------- ---------- Operating expenses........................... 1,443,282 1,290,738 1,433,853 Federal income tax expense................... -- 8,790 -- ---------- ---------- ---------- Income before equity in earnings of subsidiaries............................... 1,651,718 1,663,190 1,067,397 Equity in earnings of subsidiaries (net of dividends)......................... 2,852,889 3,150,571 1,322,952 ---------- ---------- ---------- Net income.................... $4,504,607 $4,813,761 $2,390,349 ========= ========= ========= - --------------- *Eliminated in consolidation.
See accompanying independent auditors' report. 37 39 SCHEDULE II CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT CENTRAL RESERVE LIFE CORPORATION (PARENT ONLY) STATEMENTS OF CASH FLOWS ================================================================================
YEARS ENDED DECEMBER 31, ------------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Cash Flows From Operating Activities: Net income before equity in subsidiaries*.... $ 1,651,718 $ 1,663,190 $ 1,067,397 Change in accounts payable................. (6,591) 1,538 3,184 Depreciation............................... 444,053 438,141 432,228 Change in other assets..................... (20,424) 14,076 14,075 ----------- ----------- ----------- Net cash provided by operating activities.... 2,068,756 2,116,945 1,516,884 ----------- ----------- ----------- Cash Flows From Investing Activities: Purchase of property and equipment......... (2,000) (177,400) -- ----------- ----------- ----------- Net cash used in investing activities........ (2,000) (177,400) -- ----------- ----------- ----------- Cash Flows From Financing Activities: Dividends Paid............................. (1,937,952) (1,772,615) (1,609,043) Issuance of common stock................... 1,350 59,745 60,589 Decrease in mortgage payable............... (86,687) (78,860) (71,741) ----------- ----------- ----------- Net cash used in financing activities........ (2,023,289) (1,791,730) (1,620,195) ----------- ----------- ----------- Net increase (decrease) in cash.............. 43,467 147,815 (103,311) Cash at beginning of year.................... 261,544 113,729 217,040 ----------- ----------- ----------- Cash at end of year.......................... $ 305,011 $ 261,544 $ 113,729 ========== ========== ========== - --------------- *Eliminated in consolidation.
See accompanying independent auditors' report. 38 40 SCHEDULE III CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 ================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G - ------------------------------------------------------------------------------------------------------------------------------------ FUTURE OTHER BENEFITS DEFERRED POLICY POLICY CLAIMS POLICY BENEFITS, CLAIMS NET LOSSES & ACQUISITION LOSSES & BENEFITS PREMIUM INVESTMENT SETTLEMENT SEGMENT COST AND CLAIMS PAYABLE REVENUE INCOME EXPENSES - ------------------------------------------------------------------------------------------------------------------------------------ Year ended December 31, 1995: Group life and health........ $ -- $ 6,632,320 $35,095,967 $232,637,514 $4,619,871 $158,960,388 Life insurance and Annuities.................. 209,760 23,228,579 29,500 531,015 1,639,123 6,512,215 Corporate and other.......... -- 331,156 -- -- 195,044 -- ---------- ----------- ----------- ------------ ----------- ------------ Total.................. $209,760 $30,192,055 $35,125,467 $233,168,529 $6,454,038 $165,472,603 ========== =========== =========== ============ =========== ============ Year ended December 31, 1994: Group life................... $ -- $ 116,112 $ 236,500 $ 4,828,115 $ 13,576 $ 1,457,160 Group accident and health.... -- 6,511,021 34,837,000 217,731,794 4,925,857 151,715,281 Annuities.................... -- 18,883,495 -- -- 1,143,151 1,101,771 Other........................ 149,926 1,986,257 146,492 1,119,162 433,343 983,348 ---------- ----------- ----------- ------------ ----------- ------------ Total.................. $149,926 $27,496,885 $35,219,992 $223,679,071 $6,515,927 $155,257,560 ========== =========== =========== ============ =========== ============ Year ended December 31, 1993: Group life................... $ -- $ 310,886 $ 217,000 $ 4,988,762 $ 78,172 $ 1,434,052 Group accident and health.... -- 5,937,733 31,750,000 202,850,443 4,322,475 143,272,984 Annuities.................... -- 15,954,470 -- -- 676,606 624,688 Other........................ 89,810 1,941,915 36,500 891,635 289,931 686,014 ---------- ----------- ----------- ------------ ----------- ------------ Total.................. $ 89,810 $24,145,004 $32,003,500 $208,730,840 $5,367,184 $146,017,738 ========== =========== =========== ============ =========== ============ COLUMN A COLUMN H COLUMN I - -------------------------------------------------------------- AMORTIZA- TION OF DEFERRED ACQUISITION OPERATING SEGMENT COSTS EXPENSES - ------------------------------------------------------------- Year ended December 31, 1995: Group life and health........ $ -- $67,333,980 Life insurance and Annuities.................. 59,834 542,956 Corporate and other.......... -- 452,496 ---------- ----------- Total.................. $ 59,834 $68,329,432 ========== =========== Year ended December 31, 1994: Group life................... $ -- $ 2,183,583 Group accident and health.... -- 64,449,683 Annuities.................... -- 798,322 Other........................ 60,116 578,958 ---------- ----------- Total.................. $ 60,116 $68,010,546 ========== =========== Year ended December 31, 1993: Group life................... $ -- $ 2,072,187 Group accident and health.... -- 61,556,278 Annuities.................... -- 1,291,282 Other........................ 16,849 752,554 ---------- ----------- Total.................. $ 16,849 $65,672,301 ========== ===========
See accompanying independent auditors' report. 39 41 SCHEDULE IV CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
================================================================================================================ COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - ---------------------------------------------------------------------------------------------------------------- PERCENTAGE CEDED TO ASSUMED OF AMOUNT GROSS OTHER FROM OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET - ---------------------------------------------------------------------------------------------------------------- Year ended December 31, 1995: Life insurance in force..... $1,175,823,000 $50,751,000 -- $1,125,072,000 -- ============== =========== ========== ============== ========== Premiums: Life insurance............ $ 5,815,836 $ 78,003 -- $ 5,767,543 -- Accident and health insurance............... 228,453,564 1,553,883 -- 227,400,986 -- -------------- ----------- ---------- -------------- -------- $ 234,269,400 $ 1,631,886 -- $ 233,168,529 -- ============== =========== ========== ============== ========== Year ended December 31, 1994: Life insurance in force..... $1,012,860,000 $41,424,000 -- $ 971,436,000 -- ============== =========== ========== ============== ========== Premiums: Life insurance............ $ 5,283,232 $ 65,498 -- $ 5,217,734 -- Accident and health insurance............... 220,147,427 1,686,090 -- 218,461,337 -- -------------- ----------- ---------- -------------- -------- $ 225,430,659 $ 1,751,588 -- $ 223,679,071 -- ============== =========== ========== ============== ========== Year ended December 31, 1993: Life insurance in force..... $1,016,513,000 $13,608,000 -- $1,002,905,000 -- ============== =========== ========== ============== ========== Premiums: Life insurance............ $ 5,391,994 $ 72,239 -- $ 5,319,755 -- Accident and health insurance............... 204,338,846 882,491 -- 203,411,085 -- -------------- ----------- ---------- -------------- -------- $ 209,730,840 $ 954,730 -- $ 208,730,840 -- ============== =========== ========== ============== ==========
See accompanying independent auditors' report. 40 42 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item 10 is incorporated herein by reference to the Company's Proxy Statement to Shareholders in connection with its annual meeting of Shareholders to be held on May 16, 1996, as well as Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is incorporated herein by reference to the Company's Proxy Statement to Shareholders in connection with its annual meeting of Shareholders to be held on May 16, 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is incorporated herein by reference to the Company's Proxy Statement to Shareholders in connection with its annual meeting of Shareholders to be held on May 16, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is incorporated herein by reference to the Company's Proxy Statement to Shareholders in connection with its annual meeting of Shareholders to be held on May 16, 1996. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Filed documents. The following documents are filed as part of this report: 1. Financial Statements. Central Reserve Life Corporation and Subsidiaries: Audit Report. Consolidated Balance Sheets -- December 31, 1995 and 1994. Consolidated Statements of Income -- Years ended December 31, 1995, 1994 and 1993. Consolidated Statements of Shareholders' Equity -- Years ended December 31, 1995, 1994 and 1993. Consolidated Statements of Cash Flows -- Years ended December 31, 1995, 1994 and 1993. Notes to Consolidated Financial Statements. 2. Financial Statement Schedules. Central Reserve Life Corporation and Subsidiaries: I. Summary of Investments -- Other than Investments in Related Parties. II. Condensed Financial Information of Registrant. III. Supplementary Insurance Information. IV. Reinsurance. Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto. 41 43 3. EXHIBITS: * 3(a) -- Amended Articles of Incorporation * 3(b) -- Code of Regulations **10(a) -- Employment Contract *10(b) -- Incentive Stock Option Plan *10(c) -- Agreement of Lease *10(d) -- Mortgage Note *10(e) -- Mortgage **16 -- Letter regarding change in certifying accountant. *22 -- Subsidiaries 27 -- Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended December 31, 1995. (c) Financial statements are on pages 16 to 20. - --------------- *Incorporated by reference from Registrant's Report on Form 10-K filed on March 12, 1992, file number 0-8483 and made a part hereof by such reference. **Incorporated by reference from Registrant's Report on Form 10-K filed on March 25, 1993, file number 0-8483 and made a part hereof by such reference. 42 44 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. CENTRAL RESERVE LIFE CORPORATION By: /s/ FRED LICK, JR. -------------------- Fred Lick, Jr., President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY AND IN THE CAPACITIES AND ON THE DATES INDICATED.
DATE SIGNATURE AND CAPACITY ---- ---------------------- February 29, 1996 By: /s/ FRED LICK, JR. ---------------------------------------------- Fred Lick, Jr., Chairman of the Board of Directors President, and Principal Executive Officer February 29, 1996 By: /s/ FRANK W. GRIMONE ---------------------------------------------- Frank W. Grimone, Executive Vice President, Treasurer, and Principal Financial and Accounting Officer February 28, 1996 By: /s/ ROBERT E. BRUCE ---------------------------------------------- Robert E. Bruce, Director February 28, 1996 By: /s/ WILLIAM E. GERSTENSLAGER ---------------------------------------------- William E. Gerstenslager, Director February 28, 1996 By: /s/ E. LAWRENCE HENDERSHOT ---------------------------------------------- E. Lawrence Hendershot, Director February 29, 1996 By: /s/ JOHN L. MCKEAN ---------------------------------------------- John L. McKean, Director February 29, 1996 By: /s/ JOHN F. NOVATNEY, JR. ---------------------------------------------- John F. Novatney, Jr., Director February 28, 1996 By: /s/ DAVID L. ROSSIO ---------------------------------------------- David L. Rossio, Director February 29, 1996 By: /s/ THOMAS D. SCHULTE ---------------------------------------------- Thomas D. Schulte, Director February 28, 1996 By: /s/ ROBERT K. SMITH ---------------------------------------------- Robert K. Smith, Director
43 45 EXHIBIT INDEX
SEQUENTIALLY NUMBERED EXHIBIT PAGES - --------------- --------------- 3(a) Amended Articles of Incorporation.............................. * 3(b) Code of Regulations............................................ * 10(a) Employment Contract............................................ ** 10(b) Incentive Stock Option Plan.................................... * 10(c) Agreement of Lease............................................. * 10(d) Mortgage Note.................................................. * 10(e) Mortgage....................................................... * 16 Letter regarding change in certifying accountant............... ** 22 Subsidiaries................................................... * 27 Financial Data Schedule........................................ - --------------- *Incorporated by reference from Registrant's Report on Form 10-K filed on March 12, 1992, file number 0-8483 and made a part hereof by such reference. **Incorporated by reference from Registrant's Report on Form 10-K filed on March 25, 1993, file number 0-8483 and made a part hereof by such reference.
44 EX-27 2 EXHIBIT 27
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF CENTRAL RESERVE LIFE CORPORATION AND SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000215403 Central Reserve Life YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 69,831,327 11,995,728 12,078,666 0 0 0 91,310,781 9,102,020 210,000 209,760 117,329,039 30,192,055 0 35,125,467 5,222,968 8,599,067 2,018,750 0 0 31,282,230 117,329,039 233,168,529 6,454,038 149,527 37,000 165,472,603 59,834 68,329,432 5,947,225 1,442,618 4,504,607 0 0 0 4,504,607 1.07 1.07 0 0 0 0 0 0 0
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