The majority of the Company's assets are in investments which were $83,230,323, after a net unrealized holding loss of $5,427,055 (see below), or 77% of the total assets at December 31, 1994. Fixed maturities are
Not included in premiums, for generally accepted accounting principles (GAAP) purposes, are annuity considerations in the amounts of $8,728,902 and $3,152,029 for 1993 and 1992.
Net investment income increased 16% to $5,367,184 from $4,606,036 in 1992. Favorable cash flows in 1992 and 1993 aided in the 33% increase in investments. Offsetting the effect of the increase in investments was the effect of lower interest rates since the Company primarily invests in fixed maturities. The Company continued its conservative investment policy in 1993, buying investment grade securities. In 1993 net realized
gains were $707,741 compared to $514,679 in 1992. The major portion of the net realized gains was due to calls.
Benefits and claims incurred expenses increased 28% in 1993 to $146,017,738 from $114,394,481 in 1992. This produced an incurred loss ratio of 69.9% in 1993 compared to 66.5% in 1992. A higher number of large claims than expected was experienced during the first six months of 1993. This was the main reason for the increase in the loss ratio for the current year. Reserves were strengthened and the large claims experience leveled off during the last six months of 1993.
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". SFAS 115 addresses the following points:
(a) Debt securities that management has the positive intent and ability to hold to maturity would be classified as "held to maturity" and reported at amortized cost.
(b) Debt and equity securities that are held for the purpose of selling in the near term would be classified as "trading securities" and would be reported at fair value, with unrealized gains and losses, net of tax, included in earnings.
(c) Debt and equity securities not classified as either held to maturity or trading securities would be classified as "available for sale" and would be reported at fair value, with unrealized gains and losses, net of tax, excluded from earnings and reported as a separate component of shareholders' equity.
equity. All other fixed maturities will be classified as held to maturity and will continue to be carried at amortized cost.
In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair Value of Financial Instruments". The statement requires disclosure about the fair value of financial instruments and is effective for financial statements issued for fiscal years ending after December 15, 1995 for entities, such as the Company, with less than $150 million in total assets.
As of December 31, 1994, the Company does not own nor has it purchased any derivatives as defined in SFAS 119.
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, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, 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.
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.
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses for the period. Actual results could differ significantly from those estimates.
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, 1994 and 1993 were $149,926 and $89,810, respectively. The net amounts amortized to income were $60,116 in 1994, $16,849 in 1993 and $787 in 1992.
Included in the $12 million for property and equipment is approximately $10.3 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.
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 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:
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.
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 4,201,069 in 1994, 4,182,384 in 1993 and 4,164,082 in 1992.
The Company follows Statement of Financial Accounting Standards (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
At December 31, 1994 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, 1994, short term investments include a repurchase agreement with a carrying value of $300,000. The repurchase agreement is collateralized by U. S. Treasury Notes and Bonds with a market value in excess of $300,000.
NOTE 3 -- LIABILITY FOR OTHER POLICY CLAIMS AND BENEFITS PAYABLE
The favorable development is a result of the Company strengthening reserves such as those stated above, over the last few years.
At December 31, 1994, $25,098,580 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
Central's statutory accounting practices are all prescribed by the Ohio Department of Insurance.
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 December 31, 1993. It is anticipated that the model act will be adopted in Ohio, Central's state of domicile. Based upon the December 31, 1994 statutory financial statements, Central exceeded all the required RBC levels.
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
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. Under a reinsurance treaty in effect during 1994 Central is liable for incurred claims in any one year for the deductible of $250,000 per person. In addition to the deductible, Central will also retain claims from $250,000 to $500,000 up to a minimum accumulation of $3,000,000, above which reinsurance payments are made to Central. Each individual claim is also separately reinsured for 100% in excess of $500,000. 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, 1994 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, 1994 and 1993.