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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
< X >Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange
Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION File Number: 0-2616
CONSUMERS FINANCIAL CORPORATION
1200 CAMP HILL BY-PASS
CAMP HILL, PA 17011
PENNSYLVANIA 23-1666392
(State or other jurisdiction of
(I.R.S.
Employer
incorporation or organization)
Identification
No.)
Securities registered pursuant to Section 12(b) of the Act:
Name of
each exchange
Title of each class on
which
registered
None
Not listed
Securities registered pursuant to Section 12(g) of the Act:
Name of
each exchange
Title of each class on
which
registered
Common stock (no par) (voting)
Not listed
8 1/2% Preferred Stock Series A
(Par Value $1.00 per share) (non-voting)
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
filing such requirements for the past 90 days.
Yes XX 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 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.
Based on the closing price on March 1, 1997, the aggregate
market value of
common stock held by non-affiliates of the registrant was
$9,625,839.
The number of outstanding common shares of the registrant was
2,610,397 as
of March 1, 1997. PART I
ITEM 1. BUSINESS
GENERAL
Consumers Financial Corporation (the "Company") is an
insurance holding
company which, through its subsidiaries, is a leading provider
of credit life
and credit disability insurance in the Middle Atlantic region
of the United
States. The Company also owns and administers a small block of
universal life
insurance business, but no longer markets those products.
The insurance
subsidiaries are licensed in 33 states and the District
of Columbia and
currently conduct the majority of their business in the states of
Pennsylvania,
Delaware, Maryland, Nebraska, Ohio and Virginia. Credit
insurance, which
accounted for $30 million, or 88%, of the Company's total
premium revenues in
1996, is marketed primarily through approximately 900
automobile dealers. In
connection with its credit insurance operations, the Company also
markets, as an
agent, an automobile extended service warranty contract and,
until
mid-1996,
assumed through reinsurance, certain underwriting risks on a
small block of
warranty business. Universal life insurance, which accounted for
$3.7 million
of
premium and policy charge revenues, or 11% of the Company's
total premiums and
policy charges in 1996, was marketed, until 1992, through
general agents,
p e rsonal producing general agents and independent
brokers. Additional
information regarding the termination of marketing activities in
the Individual
Life Division and the sale of the majority of the Division s
in-force business
appears below under "Operations."
The Company, through its wholly-owned subsidiary, Interstate
Auto Auction,
Inc. ("Interstate"), has also conducted wholesale and retail
automobile
auctions
of used vehicles for automobile dealers, banks and leasing
companies. See Note
5
of the Notes to Consolidated Financial Statements appearing
elsewhere in the
Form 10-K for a discussion of the sale of the operating assets
of Interstate
in
November 1996 for cash in the amount of $4.85 million.
The Company was formed in 1966 as 20th Century Corporation (a
Pennsylvania
business corporation) and adopted its present name on May 30,
1980. The Company
operates through its wholly-owned subsidiaries, principally
Consumers Life
Insurance Company (a Delaware life insurance company) (
Consumers Life ),
Consumers Car Care Corporation (a Pennsylvania business
corporation) and, until
late 1996, Interstate (a Pennsylvania business corporation).
Consumers Life
Insurance Company of North Carolina (a North Carolina life
insurance company)
and Investors Fidelity Life Assurance Corp. (an Ohio life
insurance company)
are
subsidiaries of Consumers Life Insurance Company.
T h e term "Company" when used herein refers to
Consumers Financial
Corporation and its subsidiaries unless the context requires
otherwise. The
Company's executive offices are located at 1200 Camp Hill
By-Pass, Camp Hill,
Pennsylvania 17011. Its telephone numbers are (717) 761-4230
and (800) 933-
3018.
The Company has historically operated in three industry
segments: the
Automotive Resource Division, which markets credit insurance and
other products
and services to its automobile dealer customers, the Individual
Life Insurance
Division and the Auto Auction Division. These segments exclude
the corporate
activities of Consumers Financial Corporation which are
insignificant in
relation to the three segments. The Automotive Resource
segment consists
principally of credit life and credit disability insurance
which is sold
primarily through automobile dealers and, to a limited extent,
through banks
and
other financial institutions. This segment also generates
commission revenues
on sales of automobile warranty contracts and revenues from
other related
products and services. The Individual Life segment
emphasized the sale of
universal life products which were introduced in 1985, and
had previously
marketed whole-life, term, endowment and annuity products.
Until its sale in
1996, the Auto Auction segment operated an automobile auction of
used vehicles
for automobile dealers, banks and leasing companies. Both the
individual life
insurance and the auto auction segments have been presented as
discontinued
operations in the Company's consolidated financial statements.
See Note 5 of
the
Notes to Consolidated Financial Statements appearing elsewhere in
this Form 10-
K.
In March 1992, the Company announced its decision to
terminate the
operations of its Individual Life Insurance Division. The
phase-out plan
included discontinuing the sale of insurance policies and
the sale of the
Company s existing block of individual business. Effective
October 1, 1992, the
Company sold its block of whole life, term and annuity
products to an
unaffiliated insurer but continued to administer the block of
universal life
policies. As of December 31, 1994, the Company sold its
in-force block of
direct universal life insurance business to an unaffiliated
insurer. As part of
that transaction, the Company irrevocably assigned to the same
insurer, all of
its right, title and interest to a block of universal life
business which had
been assumed previously from another unaffiliated insurer.
The Company
continued to administer these blocks of universal life
business until May 1,
1995. The Company continues to own and administer an assumed
block of universal
life business issued by an unaffiliated insurer. In March
1997, the Company
signed a definitive agreement with the direct writer whereby
that company will
recapture this business and pay the Company a recapture
consideration of $1.05
million. See Note 21 of the Notes to Consolidated
Financial Statements
appearing elsewhere in this Form 10-K for further information
regarding this
transaction.
In March 1996, the Company announced that it had
retained a financial
advisor to assist management in evaluating various alternatives
to best serve
the interests of its shareholders. The recent losses incurred
in the Company s
core credit insurance operation lead to this action in
order to preserve
shareholder value. The various alternatives which were considered
include the
sale of the insurance operations (either the existing business
and the
marketing
organization or only the marketing organization), the sale of
the auto
auction
business, the sale of the entire Company or a combination of
the Company
with
another organization. During 1996, the Company solicited
bids for both
the
insurance operations and the auto auction business. In
October 1996,
the
Company entered into a merger agreement (the Merger Agreement
) with
LaSalle
Group, Inc., pursuant to which the Company will become a
wholly-owned
subsidiary
of LaSalle. This transaction, which was approved by the
Company s common
shareholders on March 25, 1997, is subject to the approval of
various state
insurance department regulators. See Note 4 of the Notes
to Consolidated
Financial Statements appearing elsewhere in this Form 10-K
for additional
information with respect to this matter.
The following table sets forth for the periods indicated the
contribution to
revenues, which are comprised of premiums written (before
reinsurance ceded),
policy charges, net investment income, realized investment
gains and other
revenues, of each of the product lines within the Company's
remaining industry
segment. Information relating to the discontinued individual life
insurance and
auto auction segments has been excluded.
Years
Ended December 31,
(in thousands) 1996
1995 1994
Automotive Resource Division
Credit Insurance:
Life $13,542
$14,742 $15,444
Disability 18,923
20,973 21,739
Warranty contracts 1,191
1,684 1,647
Other products and services 87
129 170
33,743
37,528 39,000
Corporate 19
21 10
Net realized investment losses-
not allocated (160)
(120) (476)
Total revenues (before
reinsurance ceded) $33,602
$37,429 $38,534
The following table sets forth for the periods indicated the
contribution to
pre-tax income (loss) of each of the product lines within
the Company s
remaining industry segment. Information relating to the
discontinued individual
life insurance and auto auction segments has been excluded.
Years
Ended December 31,
(in thousands) 1996
1995 1994
Automotive Resource Division:
Credit insurance:
Life ($577)
($1,094) ($1,059)
Disability (1,996)
(1,511) (1,422)
Warranty contracts 31
219 321
Other products and services 42
(6) (22)
(2,500)
(2,392) (2,182)
Corporate (874)
(307) (401)
(3,374)
(2,699) (2,583)
Realized investment losses (160)
(120) (476)
Pre-tax loss from continuing operations ($3,534)
($2,819) ($3,059)
OPERATIONS
The Company's principal subsidiaries, which are engaged
in the credit
insurance and, until 1992, the individual life insurance
business, are
Consumers
Life Insurance Company, Consumers Life Insurance Company of
North Carolina and
Investors Fidelity Life Assurance Corp. Together these
companies are licensed
in 33 states and the District of Columbia. As noted in Item 1.
- - General, the
Company disposed of a significant portion of its individual
life insurance
business in October 1992 and December 1994 and, in March 1997,
entered into an
agreement to dispose of its remaining individual life business.
The following table sets forth the amounts of life insurance
in force at the
dates indicated:
December
31,
(in thousands) 1996 1995
1994
Direct and assumed:
Credit $1,418,853 $1,434,897
$1,427,252
Individual life 596,690 697,176
838,667
2,015,543 2,132,073
2,265,919
Reinsurance ceded (927,916)
(947,363) (1,184,134)
Net in force $1,087,627 $1,184,710
$1,081,785
For information concerning future policy benefits and unearned
premiums, see
Notes 1 and 10 of the Notes to Consolidated Financial
Statements appearing
elsewhere in this Form 10-K. Reserves for life insurance are
developed using
generally accepted actuarial principles which are widely
recognized in the
insurance industry. Methods of developing credit disability
insurance claims
reserves vary widely in the industry. The Company's methods
of establishing
credit disability claims reserves are based on its prior
claims experience.
During the last three years, the difference between actual
claims on credit
disability policies and amounts reserved has not been
significant.
Automotive Resource DIVISION
The Company sells credit insurance in connection with
consumer credit
transactions, substantially all of which are automobile
purchases. Credit life
insurance provides funds in the event of the insured's death
for payment of a
specified loan or loans owed by the insured. Similarly,
credit disability
insurance provides for the periodic paydown of such loans during
the term of
the
insured's disability. In most cases, the entire premium is paid
at the time the
insurance is issued. Premiums collected are remitted to the
Company net of
commissions. Credit insurance generally is written on a
decreasing term basis
with the policy benefit initially being the full amount
of the loan and
thereafter decreasing in amounts corresponding to the repayment
schedule. The
primary beneficiary under credit insurance is the lender, with
any proceeds in
excess of the unpaid portion of the loan payable to a named
second beneficiary
or the insured's estate.
The Company underwrites all of its credit insurance
certificates as to
certain health matters including cancer, heart disease, AIDS
and AIDS related
complex (ARC). The Company also establishes maximum age
limits beyond which
individuals are not eligible for coverage. The Company
believes that its
comprehensive training programs increase the ability of its
automobile dealer
accounts to sell insurance to a significant percentage of
automobile purchasers,
which creates a larger and more diverse pool of insureds,
thereby reducing its
mortality and morbidity risk. The Company typically experiences
a higher level
of claims on disability policies during the first quarter of each
year.
In April 1996, the Company discontinued marketing its
credit insurance
products in the state of North Carolina as a result of continued
losses on that
business. Written premiums in North Carolina were $327,000 in
1996 and $1.8
million in 1995. Certain credit insurance accounts in
Virginia were also
cancelled in 1996 because of unprofitable results. Those
accounts produced
premium revenues of $914,000 and $1,434,000 in 1996 and 1995,
respectively. In
July 1995, the Company discontinued marketing credit
insurance in Kentucky.
Written premiums in that state were $844,000 in 1995.
The Company's success in selling credit insurance is
dependent upon
establishing and maintaining favorable relationships with
automobile dealers.
To accomplish these goals, the Company provides finance and
insurance training
programs which assist dealers in arranging financing and
increasing sales of
credit insurance; it offers certain dealers the opportunity to
participate in
profits of the credit insurance business generated by them
through reinsurance
arrangements; and it provides administrative support and
claims handling
procedures to dealers. The Company also seeks the
endorsement of local and
s t a t e automobile dealer and other credit insurance
producing member
associations. In that regard, during 1996, the Company lost
the Pennsylvania
Automotive Association endorsement which it held since 1987.
The Company does
not believe the loss of the Pennsylvania endorsement will
have a materially
adverse impact on its future operating results, although
the loss of the
endorsement could result in the loss of up to 15% of the Company
s Pennsylvania
credit insurance premium revenues and service contract
commission income. To
assist the Company in developing dealer relationships, the
Company employs two
home office sales managers, one finance and insurance training
specialist and
16 salaried field representatives who solicit and service
accounts. The
Company's dealer relationships may be terminated by the Company
or the dealers
at any time without penalty. In addition to its direct
sales efforts, the
Company also purchases closed blocks of credit insurance
from unaffiliated
companies and administers the purchased business until all
coverages expire.
The credit insurance business is the major source of the
Company's revenues
and, until 1991, provided the majority of its profits as well.
As indicated
above, approximately 88% of the Company's premium revenues
during 1996 were
derived from its credit insurance business. Automobile
sales account for
substantially all of the credit insurance sold by the Company,
and have been
and
will continue to be affected, directly and indirectly, by
automobile prices,
interest rates, the availability of consumer credit and
general economic
conditions. The credit insurance industry and the Company s
credit business
have both been adversely affected in recent years by the increase
in the number
of automobiles which are leased instead of purchased. This is
principally due
to the lack of availability of approved credit insurance products
applicable to
leases and to a reluctance on the part of automobile dealers to
emphasize the
sale of credit insurance products on lease transactions. The
Company has credit
insurance products available for lease transactions in most of
the states in
which it actively markets.
Effective July 31, 1996, the Company and its joint venture
partner cancelled
an agreement whereby the companies shared in the profits or
losses from the
credit insurance business written by the Company in Pennsylvania,
the Company s
most profitable credit insurance state. As a result, on
credit insurance
premiums produced in Pennsylvania after July 31, the Company will
now retain
the
profits or losses which were previously shared with the joint
venture partner.
As consideration for terminating the venture, the Company has
agreed to pay its
former partner $500,000 in cash at the time the merger
with LaSalle is
consummated. In the event the LaSalle merger is not completed,
any payment to
the joint venture partner will be determined under a separate
calculation.
The Company's ability to retain credit insurance premiums
written is limited
by applicable statutory surplus requirements. For this reason,
the Company
reinsures substantial percentages of its credit insurance
premiums on a written
basis under quota share agreements with unaffiliated insurance
companies. These
reinsurance agreements provide statutory surplus relief, thereby
increasing the
Company's capacity to write credit insurance. An effect of this
reinsurance is,
however, to reduce the profit that the Company might otherwise
realize on its
credit insurance business. The agreements contain an experience
adjustment
computation which results in the ultimate cost of this
reinsurance being a
stated percentage of the amount of statutory surplus provided.
Security funds
are maintained by the Company in amounts which are generally
proportional to
the
ceded unearned premiums. This reinsurance does not discharge the
Company's
primary liability as the original insurer. See Note 20 of
the Notes to
Consolidated Financial Statements appearing elsewhere in this
Form 10-K for
information concerning certain regulatory matters involving
these reinsurance
treaties.
The Company also markets, in an agency capacity, extended
service automobile
warranty products through its wholly-owned subsidiary,
Consumers Car Care
Corporation. These products are underwritten by
unaffiliated insurance
companies, administered by unaffiliated third party
administrators and sold
primarily through automobile dealers, who also sell the
Company's credit
i n surance. Until mid-1996, the Company also assumed,
through another
subsidiary, a portion of the risks on these extended service
contracts pursuant
to a reinsurance arrangement with one of the unaffiliated
insurers who
underwrite the business. Other related products and services
are also offered
to the Company's automobile dealer customers.
Individual Life Insurance DIVISION
In March of 1992, the Company announced the termination of
this Division's
marketing activities and announced its intent to sell its
existing blocks of
whole-life, term, annuity and universal life business.
Effective October 1,
1992, the traditional whole-life, term and annuity business was
sold for $5.6
million to the Londen Insurance Group of Phoenix, Arizona. In
early 1993, the
Company rejected offers it received for the sale of its universal
life business
after determining that the offers were too low in relation to
the projected
future profits on that block of business.
Effective December 31, 1994, the Company coinsured its direct
universal life
business and irrevocably assigned all its right, title and
interest in a block
of assumed universal life business (coinsured from AMEX Life
Assurance Company
on a 90% quota share basis) to American Merchants Life
Insurance Company,
Jacksonville, Florida, for $5.5 million. The Company continued
to provide all
policyholder administrative functions for this business
pursuant to a service
agreement until May 1, 1995.
The Company had experienced continuing losses in its
individual life
operation due to insufficient premium levels to support the cost
of operations.
With the sale of the direct universal life business and the
AMEX business to
American Merchants and the termination of operations of CLMC
Insurance Agency,
Inc. (a general agency which marketed life insurance and
annuity products
through unaffiliated insurers), significant reductions were
made in various
direct and indirect costs. Although the remaining block of
assumed universal
life business has generally been profitable, the Company has
signed an
agreement
with the direct writer of the business whereby the direct writer
will recapture
the business effective January 1, 1997 and pay the
Company a recapture
consideration of $1.05 million. See Note 21 of the Notes
to Consolidated
Financial Statements appearing elsewhere in this Form 10-K
for additional
information regarding this transaction.
As a result of the agreement to dispose of the remaining
insurance business
of the individual life insurance division, the operating results
of this
segment
have been presented as discontinued operations in the
Consolidated Financial
Statements appearing elsewhere in this Form 10-K.
Auto Auction DIVISION
As indicated previously, the business and the related operating
assets of
Interstate were sold in November 1996 for cash of $4.85 million.
See Note 5 of
the Notes to Consolidated Financial Statements appearing
elsewhere in this Form
10-K for further information concerning the sale and its impact
on the
Company s
operating results. Prior to the sale, Interstate
conducted wholesale
automobile auctions of used vehicles at its facility in
Mercer, Pennsylvania
(about 50 miles north of Pittsburgh). The Youngstown Auto
Auction business
acquired in July of 1993 to expand the Company s auction
operations, relocated
to Lordstown, Ohio in 1994 in order to attract additional
accounts and business
to the auction. The Company subsequently ceased all operations
at Lordstown
effective December 31, 1994 and transferred a portion of its
business
operations
to Interstate. In January 1995, Interstate began conducting the
bi-weekly bank
repossession auction previously held at Lordstown. This
resulted in the
termination, as of the end of 1994, of all of Lordstown s
expenses while
maintaining a portion of its revenue base at Interstate
with virtually no
incremental costs. Interstate s customers include
automobile dealers and
leasing companies. In connection with its weekly auctions,
Interstate provides
a body shop repair and conditioning service and an arbitration
service through
which disputes between buyers and sellers can be resolved.
In 1996, prior to the sale of the business, approximately
28,000 cars were
registered for sale at Interstate through the regular
weekly consignment
auction, and approximately 57% of all vehicles registered were
sold. In 1995,
approximately 35,000 cars were registered for sale at
Interstate through the
regular weekly consignment auction, and approximately 56% of
those vehicles
were
sold. In 1994, approximately 32,000 cars were registered and 59%
of the cars
registered were sold. Auction fees are generally paid by the
seller for each
vehicle sold and an additional fee is paid by the purchaser.
The purchaser s
fees vary according to the price paid for the automobile.
BEST'S RATINGS
In both 1996 and 1995, Consumers Life Insurance Company
received a C rating
(Marginal) from A.M. Best Company, principally because of its
substantial
amount
of financial reinsurance and its relatively small capital base.
In 1994
Consumers had a C- rating (Marginal). In 1992 and 1993,
Consumers had an NA-9
rating (Not Rated at Company Request), which is assigned to any
company which
is
otherwise eligible for a letter rating, but has requested that
the rating not
be
published. The NA-9 designation was requested by Consumers
while it completed
the restructuring of its individual life insurance operations.
In 1991,
Consumers was rated "B" (Good). Consumers two operating
subsidiaries,
Consumers Life Insurance Company of North Carolina and Investors
Fidelity Life
Assurance Corp., are currently rated NR-2 (Insufficient Operating
Experience).
Best's letter ratings range from A++ (Superior) to D (Below
Minimum Standards),
with letters E and F assigned to companies under state
supervision or in
liquidation. Best's ratings are based on a comparative analysis
of the
statutory financial condition and operating performance of the
companies, rated
as determined by their publicly available reports.
INVESTMENTS
The Company's general investment policy with respect to
assets of its
insurance subsidiaries has been to invest primarily in fixed
maturity
securities
and, to a lesser extent, in mortgages with intermediate terms
(generally not
more than seven years). Investments in mortgages have allowed
the Company to
obtain higher yields while maintaining maturities in the five to
seven year
range. Prior to the sale of the Company s direct universal life
business, the
Company's investment policy also included investing in certain
mortgage-backed
securities which provided competitive yields on assets supporting
these
interest
sensitive products.
The Company's mortgage loan portfolio, which relates primarily
to commercial
real estate, is concentrated in the central Pennsylvania area.
Specifically,
about 73% of the $2.3 million in mortgage loan balances at
December 31, 1996
are
secured by properties within a 60 mile radius of Harrisburg. The
Company
considers this strategy to be conservative because this region
has historically
not been particularly susceptible to wide economic swings in
recessionary
times,
due to the diversity of industries throughout the area and the
presence of
government operations and military installations. During the past
two years,
the
Company has substantially reduced its investments in mortgage
loans in order to
improve its liquidity. See the Management s Discussion and
Analysis of
Financial
Condition and Results of Operations appearing elsewhere in this
Form 10-K for
further information concerning mortgage loans and investments.
Investments in government and corporate bonds are limited to
those with a
Moody s or Standard & Poors rating of A or better. The Company
buys U.S.
Treasury Notes for their yield and superior liquidity features.
The Company
also purchases U.S. Government agency bonds and corporate bonds
provided such
bonds are part of large liquid issues (over $100 million) and, in
the case of
corporate bonds, represent economic balance and diversification.
The Company
may also buy foreign bonds denominated in U.S. dollars (Yankee
Bonds), thereby
avoiding exposure to foreign currency risk. Short-term
investments are
maintained primarily to meet anticipated cash requirements
arising from
operations. As of December 31, 1996, the fixed maturities
portfolio did not
contain any non-investment grade securities. The Company defines
a non-
investment grade security as any security rated below Baa3 by
Moody s Investors
Service and below BBB by Standard and Poor s Rating Service. The
assets of the
Company's non-insurance subsidiaries generally have been invested
in short-term
instruments.
The following table sets forth the Company's investment
results for the
periods indicated:
Years Ended
December 31,
1996
1995 1994
Net Net
Net
Investment Yield Investment
Yield Investment Yield
Income % Income
% Income %
Interest:
Fixed maturities $2,364 6.2 $2,175
6.8 $2,773 6.4
Mortgage loans 421 9.0 692
8.1 2,138 10.1
Policy loans 33 6.6 58
13.9 (2 250 6.6
)
Short-term investments 223 4.5
186 4.4 168 3.3
Real estate 157 (1) 332
30.7 3) 177 15.5
Other 59 2.7 38
1.8 117 6.3
3,257 6.5 3,481
7.2 5,623 7.4
Investment expenses (680) (0.9) (702)
(0.9) (649) (0.9)
Total net investment
income 2,577 5.6 2,779
6.3 4,974 6.5
Less net investment
income discontinued 490
543 2,096
operations
Net investment income
attributable to
continuing $2,087 $2,236
$2,878
operations
(1) Represents rental income related to three properties
classified as non-
investment real estate.
(2) Includes $27,000 in interest which should have been included
in 1994
income.
If this income had been included in 1994, the yield in 1995
would have been
7.4% and the 1994 yield would have been 7.3%.
(3) Includes $170,000 in rental income related to a property
classified as non-
investment real estate. Excluding this income, the real
estate yield is
6.8%.
COMPETITION
The Company competes with numerous other credit insurance
companies, many
of
which are larger than the Company and have greater financial and
marketing
resources. The principal competitive factors in the automobile
credit insurance
industry are commission levels, the quality of training for
dealers, the
ariety
f related products, the availability of dealer incentive programs
and the level
of administrative support and efficiency of claims handling
procedures. The
Company believes that it is able to compete successfully on the
basis of these
factors.
The Company pays relatively high commissions in order to
remain competitive
in states that do not mandate maximum commissions. In states
which have
established maximum commissions by regulation, there is generally
no commission
competition among companies. The elimination of the existing
commission limits
in Pennsylvania, Maryland and Nebraska, the only states where the
Company has
any significant amount of business which regulate commission
levels, could have
a detrimental effect on the Company's business because agents
could negotiate
for higher commissions on the sale of credit insurance without a
corresponding
increase in premiums. The Company is not aware that any of these
states is
considering elimination of maximum commission regulations.
Because the Company markets its extended service warranty
products
primarily
in connection with its marketing of credit insurance to
automobile dealers, its
ability to sell this product is a function of its ability to
compete in the
credit insurance market. The availability of financially sound
insurance
underwriters and capable third party warranty administrators are
additional
factors which affect the Company's ability to market its extended
service
warranty products effectively.
The marketing areas for the auto auction included western
Pennsylvania,
western New York, eastern Ohio and the West Virginia panhandle.
Interstate
competed with five automobile auctions in its market areas. The
principal
competitive factors in this business are the quality of
management, the amount
of auction fees charged, location in relation to major
metropolitan markets,
the
quality of the physical plant and facilities and other services
offered, such
as
title guarantees. The Company was able to compete effectively
on the basis of
these factors.
REGULATION
The Company's insurance subsidiaries are subject to
regulation and
supervision in the states in which they are licensed. The extent
of such
regulation varies from state to state, but, in general, each
state has
statutory
restrictions and a supervisory agency which has broad
discretionary
administrative powers. Such regulation is designed primarily to
protect
policyholders and relates to the licensing of insurers and their
agents, the
approval of policy forms, the methods of computing financial
statement
reserves,
the form and content of financial reports and the type and
concentration of
permitted investments. The Company's insurance subsidiaries are
subject to
periodic examination by the insurance departments in the states
of their
formation and are also subject to joint regulatory agency
examination and
market
conduct examinations in the other states in which they are
authorized to do
business.
Certain states in which the Company is licensed have
regulations limiting
the credit insurance premium rates or the commissions payable to
agents or, in
some cases, limiting both rates and commissions payable. In
addition, some
states have regulations that require credit insurance claims
ratios to be a
specified percentage of earned premiums. If an insurer's claims
ratio is
below
the prescribed benchmark, it is required to reduce premium rates
and,
conversely, if the claims ratio is higher than the benchmark, the
insurer may
request an increase in premium rates.
The dividends which a life insurance company may distribute
are subject to
regulatory requirements based upon minimum statutory capital and
surplus and/or
statutory earnings. In addition to regulatory considerations,
the overall
financial strength of each operating entity is considered before
dividends are
paid. Additionally, the amount of dividends a life insurance
company can pay
is subject to certain tax considerations. See Notes 2 and 17 of
the Notes to
Consolidated Financial Statements appearing elsewhere in this
Form 10-K.
The Company is also subject to regulation under the insurance
holding
company laws of various states in which it does business. These
laws vary from
state to state, but generally require insurance holding companies
and insurers
that are subsidiaries of holding companies to register and file
certain
reports,
including information concerning their capital structures,
ownership, financial
condition and general business operations, and require prior
regulatory agency
approval of changes in control of an insurer, most dividends and
intercorporate
transfers of assets within the holding company structure. The
purchase of more
than 10% of the outstanding shares of the Company's common stock
by one or more
affiliated parties would require the prior approval of certain
state insurance
departments which regulate the Company.
EMPLOYEES AND AGENTS
As of December 31, 1996, the Company had approximately 54
full-time
employees, including its management and sales personnel. In
addition, as of
that date there were approximately 900 licensed agents selling
credit insurance
and vehicle extended service contracts, most of whom were
full-time employees
of
automobile dealers, banks and other financial institutions.
The Company has adequate insurance coverage against employee
dishonesty,
theft, forgery and alteration of checks and similar items. The
Company does
not
have similar coverage for its agents. There can be no assurance
that the
Company will be able to continue to obtain such coverage in the
future or that
it will not experience uninsured losses.
ITEM 2. PROPERTIES
Since September 1989, the Company has maintained its
executive and business
offices in a leased building located at 1200 Camp Hill By-Pass,
Camp Hill,
Pennsylvania. The office building contains approximately 44,500
square feet of
office space. Prior to 1993, the Company leased the entire
facility at an
annual rental of $421,000, plus insurance, taxes and utilities.
As a result of
the termination in 1992 of all new business functions in the
Individual Life
Insurance Division, the Company now occupies approximately 67% of
the available
office space. The Company has leased about 66% of the remaining
space to third
party tenants. Annual rental income to the Company under these
sub-leases
totals $83,000. In March of 1994, the Company exercised its
option to acquire a
50% interest in its home office building, which reduced the
Company s annual
rent to $204,000. The option price was approximately $1.75
million. In late
1996, the Company, along with the other 50% owner, granted an
option to
purchase
the home office building to an unrelated third party. The option
expired in
March 1997 and was not renewed. Except as otherwise noted, the
business
operations of the Company and all of the subsidiaries are
conducted at the
above
address in Camp Hill, Pennsylvania.
In connection with its insurance operations, Consumers Life
Insurance
Company maintains a branch office in leased facilities in
Philadelphia,
Pennsylvania. The branch office primarily provides supervision,
sales and
service for credit insurance agents doing business in the eastern
Pennsylvania,
Delaware and New Jersey areas. Annual rental for this office is
approximately
$27,000.
Investors Fidelity Life Assurance Corp. maintains an office
in leased
facilities in Columbus, Ohio. This office primarily provides
sales support and
supervision for credit insurance agents in the State of Ohio.
Annual rental for
this office is approximately $13,000 plus insurance, taxes and
utilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various lawsuits which are ordinary
and routine
litigation incidental to its business. None of these lawsuits is
expected to
have a materially adverse effect on the Company's financial
condition or
operations. See Note 14 of the Notes to Consolidated Financial
Statements
appearing elsewhere in this Form 10-K for additional information
concerning
litigation matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the Fourth Quarter of 1996 to
the
shareholders of the Company for their consideration through the
solicitation of
proxies or otherwise. PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
CONSUMERS Financial Corporation common stock and Convertible
Preferred
Stock, Series A, are traded on the NASDAQ, National Market
System. Ticker
symbols are CFIN and CFINP, respectively.
1996 QUARTERLY
STOCK PRICES
1ST
2nd 3rd 4th
Quarter
Quarter Quarter Quarter
Common Stock
High 4 3
1/2 3 3/8 3 15/16
Low 3
3 2 1/2 2 3/4
Convertible Preferred Stock
Series A
High 9 1/2 9
1/2 9 3/8 9 1/2
Low 8 8
1/4 8 1/4 8 1/4
Directors, officers and employees of Consumers Financial
Corporation have a
sizeable ownership position in Consumers, which is derived from
the Company s
belief that this provides a strong incentive for all parties
involved to
enhance
shareholder value. At December 31, 1996, the Company s Employee
Stock Ownership
Plan held 10% of the total common stock outstanding.
As of December 31, 1996, there were 6,834 shareholders of
record who
collectively held 2,611,532 common shares and 130 shareholders of
record of the
Convertible Preferred Stock, Series A, who held 481,461 shares.
Dividends on both the Company s common stock and Convertible
Preferred
Stock, Series A, are declared by the Board of Directors. No
common stock
dividends were declared in either 1996 or 1995; however, common
stock dividends
had been paid for 14 consecutive years through 1994. The 1994
common stock cash
dividend was $.05 per share. The Convertible Preferred Stock,
Series A,
dividends are paid quarterly on the first day of January, April,
July and
October. The annual Convertible Preferred Stock, Series A, cash
dividend is
$.85 per share.ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain information contained
in or derived
from the Consolidated Financial Statements and the Notes thereto.
(Not covered by Independent Auditor s Report)
Years Ended December 31,
(dollar amounts in thousands, 1996 1995 1994
1993 1992
(Resta (Resta
(Resta (Resta
Total revenues (before $33,60 $37,43 $38,53
$37,16 $34,86
Premiums written (before 30,350 33,832 34,916
31,944 29,623
Net investment income 2,087 2,236 2,878
3,403 4,270
Net return on average 5.4% 6.0% 6.7%
7.2% 7.4%
Loss from continuing operations (2,706 (2,072 (2,513
(2,513 (2,838
Discontinued operations 1,472 471 1,301
685 3,361
Income (loss) before cumulative
change in accounting (1,234 (1,601 (1,212
(815) 523
Cumulative effect of change in 299
(710)
Net income (loss) (1,234 (1,601 (913)
(1,525 523
Income (loss) per common and
equivalent share:
Loss from continuing (1.20) (0.96) (1.10)
(0.71) (0.63)
Discontinued operations 0.56 0.18 0.48
0.25 0.65
Income (loss) before
In accounting principles (0.64) (0.78) (0.62)
(0.46) 0.02
Cumulative effect of change 0.11 (0.26)
Net income (loss) (0.64)
(0.78) (0.72) 0.02
December 31,
1996 1995 1994
1993 1992
Total assets 114,61 123,32 125,27
144,39 174,00
Total debt 0 2,537 3,389
4,683 5,987
Shareholders equity and 13,343 15,671 15,226
19,502 21,295
Shareholders equity per common 3.31 4.20 3.96
5.41 5.91
Return on average total equity,
preferred stock (7.9%)
(9.9%)
(5.1%) (7.4%) 2.8%
Cash dividends declared per NONE NONE 0.05
0.05 0.05
Life insurance in force (before 2,015, 2,132, 2,265,
2,489, 2,917,
NOTE: The financial data for the years ended December 31, 1992
through 1995 has
been restated to reflect the operating results of the Company
s individual
life insurance and auto auction businesses as discontinued
operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
A review of the significant factors which affected the
Company's 1996
operating performance as well as its financial position at
December 31, 1996 is
presented below. Information relating to 1995 and 1994 is also
presented for
comparative purposes. This analysis should be read in
conjunction with the
Consolidated Financial Statements and the related Notes.
OVERVIEW
Because of the recurring losses in the Company s core
credit insurance
business, in early 1996, the Company began evaluating
alternatives to best
serve
the interests of its shareholders. The Company considered
several
alternatives, including the following: (1) the sale of its
insurance
operations, (2) the sale of its credit insurance marketing
organization (with
retention and ongoing administration of inforce business), (3)
the sale of its
auto auction business, (4) the sale of the Company, (5) the
reorganization of
the Company or (6) the combination of the Company with another
organization in
the same or other line of business. In January 1996, the Company
engaged a
financial advisor to assist in evaluating the many alternatives
to maximize
shareholder value. The Company subsequently solicited bids
for both its
credit and universal life insurance operations and its auto
auction business.
In October 1996, the Company entered into an Agreement and Plan
of Merger with
LaSalle Group, Inc. ( LaSalle ) whereby the Company will become a
wholly-owned
subsidiary of LaSalle. The merger transaction, which is subject
to insurance
regulatory approval, was approved by the Company s common
shareholders on March
25, 1997. See Note 4 of the Notes to Consolidated Financial
Statements
appearing elsewhere in this Form 10-K for additional information
with respect
to
the pending merger.
LaSalle's strategic plan following the merger includes
focusing on and
rebuilding the Company's core credit insurance operation by
combining it with
other credit insurance businesses LaSalle plans to acquire.
Accordingly, in
November 1996, the Company sold the business and related
operating assets of
Interstate Auto Auction, Inc. to an unrelated third party for
cash in the
amount
of $4.85 million. In addition, in March 1997, the Company signed
an agreement
to sell its remaining block of individual life insurance
business, following
the
sale of other blocks of individual life business in both 1992 and
1994. As a
result of these sale transactions, in the Company's consolidated
financial
statements appearing elsewhere in this Form 10-K, the operating
results and the
net gain from disposal of both the individual life insurance and
the auto
auction segments have been reported as discontinued businesses
for all periods
presented. Further information regarding these transactions is
presented later
in this analysis and in Note 5 of the Notes to Consolidated
Financial
Statements
appearing elsewhere in this Form 10-K.
The Company reported a net loss for 1996 of $1.2 million
($.64 per share)
compared to a loss of $1.6 million ($.78 per share) in 1995 and a
loss of
$913,000 ($.51 per share) in 1994. However, the loss from
continuing
operations
was $2.7 million in 1996 compared to losses of $2.1 million and
$2.5 million,
on
a restated basis, in 1995 and 1994, respectively. The higher 1996
loss from
continuing operations is due primarily to the costs incurred by
the Company in
connection with valuing and offering for sale the Company's
various
businesses.
Discontinued operations for 1996 include not only the operating
results of each
of the discontinued segments but also a $1.8 million gain on the
disposal of
the
auto auction business and related assets and a loss of $914,000
arising from
the
write-off of deferred policy acquisition costs based on the
consideration to be
received in 1997 from the sale of the individual life insurance
business.
The Company's remaining business segment, the Automotive
Resource
Division, continued to report operating losses in 1996. The
Division's credit
insurance results declined slightly from 1995 due to higher
disability claims,
which offset significantly lower general expenses.
A more detailed discussion of the operating performance of
each of the
Company's business segments, including the two discontinued
businesses, is
presented later in this analysis under Results of Operations.
The following table compares revenues and operating results
for each of
the past three years. Amounts for 1995 and 1994 have been
restated to reflect
the operating results of the individual life insurance and auto
auction
businesses as discontinued operations.
(in thousands, except per
1996 1995 1994
share amounts)
Total revenues by business unit:
Automotive Resource Division:
(principally credit
$33,743 $37,528 $39,000
insurance)
Corporate
19 21 10
Realized investment losses-not
(160) (120) (476)
$33,602 $37,429 $38,534
Pre-tax loss from continuing
operations:
Automotive Resource Division
($2,500) ($2,392) ($2,182)
Other
(874) (307) (401)
(3,374) (2,699) (2,583)
Realized investment losses
(160) (120) (476)
Pre-tax loss from continuing
(3,534) (2,819) (3,059)
operations
Income tax benefit
(828) (747) (546)
Loss from continuing operations
(2,706) (2,072) (2,513)
Discontinued operations, net of
1,472 471 1,301
income taxes
Loss before cumulative effect
of change in accounting
(1,234) (1,601) (1,212)
principle
Cumulative effect of change in
accounting principle
299
Net loss
($1,234) ($1,601) ($913)
Income (loss) per common share:
Loss from continuing operations
($1.20) ($0.96) ($1.10)
Discontinued operations
0.56 0.18 0.48
Loss before cumulative effect
change in accounting
(0.64) (0.78) (0.62)
Cumulative effect of change in
accounting principle
0.11
Net loss
($0.64) ($0.78) ($0.51)
RESULTS OF OPERATIONS
The Company's pre-tax operating results for the past three
years can be
best understood through an analysis of each of its three business
units. The
Automotive Resource Division, the Company's core business, is now
the only
continuing business segment. The Division's principal product is
credit
insurance, which it markets primarily through automobile dealers
in six key
states. It also markets automobile extended service contracts in
a general
agency capacity and generates other revenues from services it
provides to
approximately 900 automobile dealer customers. The Individual
Life Insurance
Division has not written any new business since 1992. Closing on
the sale of
the
Division's remaining block of insurance business took place on
March 27, 1997.
Auto auction operations were conducted through the Company's
subsidiary,
Interstate Auto Action, Inc., until the sale of Interstate's
business and
operating assets in late 1996.
Automotive Resource Division
Premium revenues from credit insurance, the Division's
principal product,
declined 9.5% in 1996 from $33.1 million to $30 million. In
1995, premiums
decreased 3.3% from the $34.3 million in premiums written in
1994. The
cancellation of unprofitable business played a major part in the
reduction in
premiums in both 1996 and in 1995. As a result of continued
unprofitable
results, all of the Division's accounts in the state of North
Carolina and
numerous accounts in Virginia and Ohio were canceled during 1996.
A similar
action was taken in the state of Kentucky in 1995. Excluding
these accounts,
the 1996 drop in premium revenues was nominal. The Division's
credit insurance
premium production remains significantly below pre-1990 levels
due to the
declines which occurred during the economic recession of the
early 1990's. A
consequence of the decline in written premiums has been a
reduction in earned
premiums, which in turn has resulted in a substantial increase in
operating
expense ratios since 1989. Higher expense ratios have been a key
reason for
the
unprofitable operating results the Division has experienced in
recent years.
During 1996, the Company lost the endorsement of the Pennsylvania
Automotive
Association which it held since 1987. The Company believes that
the loss of
the
endorsement will have some effect on its future premium
production in
Pennsylvania, although it is not expected to have a materially
adverse impact
on
future operating results.
The Division's pre-tax operating results for 1996 declined
from a $2.4
million loss in 1995 to a loss of $2.5 million. A significant
increase in the
credit disability claims ratio on retained business (i.e.,
business not
reinsured to captive insurance companies) offset a $900,000
reduction in
general
expenses. General expenses in both years now include expenses
which had
previously been allocated to the discontinued Individual Life
Insurance
Division
and, to a lesser extent, the discontinued Auto Auction Division.
The Company
does not believe the level of disability claims in 1996 and the
claims ratio in
1996 are an indication of any unfavorable trend. In that regard,
claims ratios
in the first two months of 1997 are well below the ratios for the
same period
in
1996. While the Division's expense ratio improved in 1996, the
present ratio
is
still higher than the ratio which is required to return the
Division to
profitability. As noted above, the increased expense ratio
compared to the
ratio in the late 1980's is a key reason for the Division's
continued losses.
In July 1996, the Company and its joint venture partner
canceled an
agreement whereby the companies shared in the profits from the
credit insurance
business written by the Company in Pennsylvania, the Company's
most profitable
credit insurance state. As a result, on credit premiums produced
in
Pennsylvania after July, the Company will now retain the profits
or losses
which
were previously shared with the joint venture partner. As
consideration for
terminating the venture, the Company has agreed to pay its former
partner
$500,000 in cash at the time the above-referenced merger with
LaSalle is
consummated. In the event the LaSalle merger is not completed,
any payment to
the joint venture partner will be determined under a separate
calculation.
If the proposed merger with LaSalle is completed, LaSalle's
strategy to
return the Company's credit insurance operation to profitability
will include
acquisitions of other credit insurance companies and other blocks
of credit
insurance business, expansion of the Company's marketing
territory and growth
in
existing markets. LaSalle intends to provide additional capital
not only to
finance growth by also to build the insurance subsidiaries'
capital base in
order to improve the ratings of those companies by insurance
rating agencies.
Individual Life Insurance Division
Operations in the Individual Life Insurance Division in
1996 and 1995
were
limited to one closed block of assumed universal life business,
following the
sale of the Division's direct universal life business in 1994 and
the sale of
its traditional whole life and term business in 1992. In March
1997, the
Company signed an agreement with World Insurance Company
("World"), pursuant to
which World will recapture the universal life business previously
assumed by
the
Company from World through a joint venture agreement which began
in 1987. World
will pay a recapture consideration to the Company in the amount
of $1.05
million. In exchange, the Company will transfer to World assets
supporting the
net statutory basis policy reserves for this business. Based on
the recapture
consideration to be received, the Company has written off $1.4
million in
deferred policy acquisition costs which are not recoverable.
This write-off,
which totaled $914,000 on an after-tax basis, has been presented
as a loss on
disposal of the discontinued segment in the Company's 1996
financial
statements.
Excluding the write-off, the Division reported pre-tax
income of $393,000
in 1996 compared to restated pre-tax income of $83,000 in 1995.
The Division's
operating results for 1996 reflect the elimination of any
continuing overhead
and indirect costs which had previously been allocated to this
Division. The
results for prior periods have been restated to also eliminate
these costs.
These reallocated costs totaled $292,000 in 1996 and $330,000 in
1995. Higher
than normal claims costs in the first half of 1995 adversely
affected the
results for that year and are the principal reason for the lower
earnings in
1995.
Auto Auction Division
On November 6, 1996, the Company sold the auto auction
business and
related operating assets (property and equipment and inventories)
of Interstate
Auto Auction to ADESA Pennsylvania, Inc. for cash of $4.85
million. The
Division's pre-tax income for the first nine months of 1996,
which excludes any
continuing overhead, was $554,000 compared to income of $732,000,
as restated
to
eliminate any continuing overhead, in 1995. The operating
results of the auto
auction after September 30, 1996, when the Company finalized its
plan to
dispose
of the business, have been included with the gain realized on the
disposal of
the auction business. The auction generated an $84,000 pre-tax
loss ($57,000
after taxes) during this period.
Approximately $1.7 million of the proceeds from the sale of
the auto
auction business was used to repay the remaining amount due on
the Company's
bank loans.
FINANCIAL CONDITION
A discussion of the important elements affecting the
Company's financial
position at December 31, 1996 and 1995 is presented below.
Invested Assets
Invested assets at December 31, 1996 totaled $51.2 million
compared to
$49
million at the end of 1995. The $3.1 million in proceeds
received from the
sale
of the auto auction business, after repayment of the bank debt,
is the primary
reason for the increase in investments. Those proceeds were
invested
principally in bonds. Approximately $750,000 of the proceeds
will be required
in 1997 for Federal and state income taxes on the gain from this
sale. The
invested asset base also increased as a result of the sale of
$1.2 million in
non-investment real estate for cash, the proceeds from which were
reinvested in
bonds. In addition, during 1996, the Company completed the sale
of all but one
of the town homes in a real estate development acquired in 1995
through
foreclosure. This property, which had a $1.5 million carrying
value at December
31, 1995, was classified as non-investment real estate. The
proceeds from the
sales of the town home units have also been reinvested primarily
in bonds.
The increases discussed above were partially offset by a
$923,000
reduction in the carrying value of the Company's bond portfolio
as a result of
higher interest rates since the end of 1995. The Company's bond
portfolio is
carried at fair value pursuant to the requirements of Statement
of Financial
Accounting Standards No. 115, based on the Company's
determination that all of
its bonds should be considered as "available-for-sale", although
the Company
has
no current intentions to sell any of these securities (except for
approximately
$8.3 million in bonds which were sold in 1997 in order to
complete the above-
referenced sale transaction with World - see the Individual Life
Insurance
Division section of this Management s Discussion and Analysis).
The unrealized
appreciation or depreciation on available-for-sale securities is
reported as a
separate component of shareholders' equity.
The Company s general investment policy continues to
emphasize fixed
maturity securities (primarily bonds) with Moody's or Standard
and Poor's
ratings of A or better and mortgage loans with terms generally
not more than
seven years. The Company has not invested in non-investment
grade securities
because the greater returns on such investments do not justify
the potentially
greater risks.
During 1996, the Company increased its loan loss reserves
for mortgage
loans and investment and non-investment real estate by $35,000.
Loan loss
reserves were increased by $93,000 and $450,000 in 1995 and 1994,
respectively.
Management believes that its reserves at December 31, 1996 are
adequate to
cover
any possible losses which may develop in its mortgage loan and
real estate
portfolios. The carrying value of these investments at December
31, 1996 was
$3.4 million compared to $10.7 million at the end of 1995.
During 1996, the Company's mortgage loan portfolio declined
from $7
million to $2.3 million. The substantial reduction is the result
of the early
payoff of four mortgages with balances at the end of 1995 of $2.7
million and
the sale to a local bank of seven loans with balances totaling $2
million. The
proceeds from these transactions were reinvested primarily in
bonds.
Liquidity
Liquidity refers to a company s ability to meet its
financial obligations
and commitments as they come due. The Company s operating
subsidiaries have
historically met most of their cash requirements from funds
generated from
operations, although, as discussed below, reduced credit
insurance revenues
over
the past several years have had a significant impact on the
insurance companies
operating cash flows. The Company, as a holding company, has
generally relied
on its operating subsidiaries to provide it with sufficient cash
funds to meet
its debt service obligations, pay corporate expenses and
shareholder dividends.
In that regard, the life insurance subsidiaries are also subject
to
restrictions
imposed by law on their ability to transfer cash to the Company
in the form of
dividends, loans or advances.
Dividends and other distributions to the Company from
Consumers Life are
limited in that the subsidiary is required to maintain minimum
capital and
surplus, determined in accordance with regulatory accounting
practices. All
distributions are further limited by Delaware state insurance
laws to the
greater of the previous year s earnings, computed in accordance
with statutory
accounting principles, or 10% of statutory capital and surplus as
of the end of
the previous year. In some instances such payments may require
the prior
approval of the insurance department. Also, any loans or
advances to the
Company of a material amount must be reported to the insurance
department. The
Company may have limited cash funds available to pay dividends in
excess of
amounts transferred from Consumers Life and other subsidiaries.
In addition,
separate restrictions apply to the surplus note owed to the
Company by a
subsidiary of Consumers Life. Note 2 of the Notes to
Consolidated Financial
Statements discusses these restrictions more specifically. The
Company s non-
life insurance operations, particularly its insurance agency
business, provide
sources of cash which are not subject to regulatory restrictions.
Prior to its
sale, the auto auction business was also a source of significant
cash flows for
the Company.
The principal sources of cash funds of the life insurance
subsidiaries are
premiums and investment income, as well as proceeds from sales
and maturities
of
investments. These companies use cash primarily to pay
commissions, claims and
operating expenses. Credit insurance is the Company s principal
product line
and credit insurance premiums are therefore the Company s
principal source of
premium revenues. Credit insurance premium levels during the
past five years
are substantially lower than the premium levels prior to the
economic recession
in the early 1990's. This continued reduction in cash funds has
depleted most
of the Company s short-term cash reserves and has caused some
decline in its
long-term investment base. The assessment by the Company s
management and its
Board of Directors that this decrease in revenues and the related
decline in
operating results could not be reversed within a reasonable
period of time led
to the decision in early 1996 to evaluate other alternatives to
best serve the
interests of its shareholders. This evaluation process, in turn,
led to the
proposed merger transaction discussed in the Overview section
of this
Management s Discussion and Analysis and in Note 4 of the Notes
to Consolidated
Financial Statements.
During 1994, the funds generated from the sale and maturity
of investments
exceeded the funds used to acquire new investments, which was
indicative of the
Company s need for additional cash for operating needs. In 1995
and 1996, as a
result of additional reductions in general expenses, the Company
was able to
reinvest the funds it generated from the sale and maturity of
other
investments. During 1994, a substantial amount of investments
were sold in
connection with the sale of the Company s direct universal life
business to a
third party. Cash and other assets were transferred to the
reinsurer along with
the Company's liability for future policy benefits on this
business.
Capital Resources
The Company s total equity, including redeemable preferred
stock,
decreased by approximately $2.2 million during 1996. The decrease
is
attributable to (1) the current year net loss of $1.2 million,
(2) the decline
in the carrying value of the bond portfolio ($923,000 less
$314,000 in
applicable deferred income taxes), (3) $409,000 in dividends to
preferred
shareholders and (4) the purchase of treasury shares at a cost of
$50,000.
Shareholders equity per common share also decreased from $4.20
at December 31,
1995 to $3.31 at the end of 1996.
The Company continued to reduce its outstanding bank debt
during 1996.
During the first ten (10) months of the year, principal payments
of $845,000
were made. On November 6, 1996, in conjunction with the sale of
the auto
auction business discussed above, the remaining $1.7 million in
debt was repaid.
Inflation
Inflation influences the Company's Automotive Resource
Division through
its effects on automobile prices and interest rates. An increase
in car prices
not only affects the amount of credit insurance premiums
collected, due to
higher loan amounts, but also generally extends the term of car
loans. Interest
rates affect the consumers' ability to borrow funds which, in
turn, affects
automobile sales and ultimately the Company's marketing of credit
insurance and
related products. Because of regulatory standards, the Company's
premium rates
cannot be readily changed to reflect increased costs arising from
inflationary
trends.
MANAGEMENT S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of the Company is responsible for the
preparation,
integrity and objectivity of the financial information contained
in this Form
10-K. The accompanying consolidated financial statements have
been prepared in
accordance with generally accepted accounting principles. Such
statements
include informed estimates and judgements of management for those
transactions
that are not yet complete or for which the ultimate effects
cannot be precisely
determined. Financial information presented in this annual report
is consistent
with that in the financial statements.
Accounting procedures and related systems of internal
control have been
established to provide reasonable assurance that the books and
records reflect
the transactions of the Company and that established policies and
procedures
are
properly implemented by qualified personnel. Such systems are
evaluated
regularly to determine their effectiveness.
The consolidated financial statements for the years ended
December 31,
1996 and 1995 have been audited by Arthur Andersen LLP,
independent auditors.
The consolidated financial statements for the year ended December
31, 1994 have
been audited by Ernst & Young LLP, independent auditors. Such
audits were
conducted in accordance with generally accepted auditing
standards, and include
a review and evaluation of our internal accounting control
structure, tests of
the accounting records and other auditing procedures they
consider necessary to
express their informed professional opinion on the consolidated
financial
statements.
The Board of Directors, with the assistance of its Audit
Committee,
monitors the financial and accounting operations of the Company.
The Committee,
composed of non-employee members of the Board of Directors, meets
periodically
with representatives of its independent auditing firm to discuss
the scope of
its audit and related reports. The Company s independent
auditors have at all
times full and free access to the Audit Committee, without
management present,
to discuss any matter that they believe should be brought to the
attention of
the Committee.
James C. Robertson R.
Fredric Zullinger
Chairman, Chief Executive Officer Chief
Financial
Officer
and President
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Consumers Financial Corporation
We have audited the accompanying consolidated balance
sheets of Consumers
Financial Corporation (a Pennsylvania corporation) and
subsidiaries as of
December 31, 1996 and 1995, and the related consolidated
statements of
operations, shareholders equity and cash flows for the years
then ended. These
financial statements and the schedules referred to below are the
responsibility
of the Company s management. Our responsibility is to express an
opinion on
these financial statements and 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
audits 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 the
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.
As discussed in Note 4 of the Notes to Consolidated
Financial Statements,
on October 30, 1996, the Company entered into an Agreement and
Plan of Merger
with LaSalle Group, Inc. (LaSalle). The merger is subject to the
approval of
the
insurance regulators in the four states in which the Company s
insurance
subsidiaries are domiciled. In addition, the Company is
addressing regulatory
matters in various states, and the Company s plans relative to
those matters
are
discussed in Note 20.
In our opinion, the financial statements referred to above
present fairly,
in all material respects, the financial position of Consumers
Financial
Corporation and subsidiaries as of December 31, 1996 and 1995,
and the results
of their operations and their cash flows for the years then
ended, in
conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion
on the basic
consolidated financial statements taken as a whole. The schedules
listed in the
index of financial statement schedules at Item 14(a) are
presented for purposes
of complying with the Securities and Exchange Commission s rules
and are not
part of the basic financial statements. The 1996 and 1995 amounts
included in
these schedules have been subjected to the auditing procedures
applied in the
audit of the basic consolidated financial statements and, in our
opinion,
fairly
state in all material respects the financial data required to be
set forth
therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN
LLP
New York, New York
March 28 , 1997
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Consumers Financial Corporation
We have audited the accompanying consolidated statement of
operations,
shareholders equity and cash flows of Consumers Financial
Corporation and
subsidiaries for the
year ended December 31, 1994. Our audit also included the 1994
amounts in the
financial statement schedules listed in the index at item 14(a).
These
financial
statements and schedules are the responsibility of the Company s
management.
Our
responsibility is to express an opinion on these financial
statements and the
1994 amounts in the schedules based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present
fairly, in all material respects, the consolidated results of the
operations of
Consumers Financial Corporation and subsidiaries and their cash
flows for the
year ended December 31, 1994, in conformity with generally
accepted accounting
principles. Also, in our opinion, the 1994 amounts in the related
financial
statement schedules, when considered in relation to the basic
financial
statements taken as a whole, present fairly, in all material
respects, the
information set forth therein.
As discussed in Note 3 to the consolidated financial statements,
in 1994 the
Company changed its method of recognizing earnings on credit
disability
insurance.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
March 24, 1995
CONSUMERS FINANCIAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(dollar amounts in thousands) 1996
1995
Assets
Investments:
Fixed maturities $42,618
$35,048
Mortgage loans on real estate 2,286
7,041
Investment real estate
1,020
Policy loans 518
482
Other invested assets 1,866
2,512
Short-term investments 3,901
2,892
Total investments 51,189
48,995
Cash 556
451
Accrued investment income 731
653
Receivables 20,290
23,820
Prepaid reinsurance premiums 17,338
18,604
Deferred policy acquisition costs 18,949
21,926
Property and equipment 2,168
4,118
Other real estate 1,115
2,645
Other assets 2,283
2,110
$114,619
$123,322
Liabilities, Redeemable Preferred Stock and Shareholders
Equity
Liabilities:
Future policy benefits $35,386
$36,582
Unearned premiums 56,178
57,943
Other policy claims and benefits 2,736
2,851
Other liabilities 5,495
6,259
Income taxes:
Current 1,185
299
Deferred 296
1,180
Notes payable
2,537
Total liabilities 101,276
107,651
Redeemable preferred stock:
Series A, 8 1/2% cumulative
issued 1996 and 1995, 536,500
and 1995, 481,461 shares;
and 1995, $4,815; net of treasury 4,693
4,657
Shareholders equity:
Common stock, $.01 stated value,
issued 1996, 3,021,496 shares,
outstanding 1996, 2,611,532 shares, 30
30
Capital in excess of stated value 7,966
8,016
Net unrealized appreciation of debt 70
705
Retained earnings 2,009
3,688
Treasury stock (1,425)
(1,425)
Total shareholders equity 8,650
11,014
$114,619
$123,322
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
Years Ended December 31, 1996,
1995 and 1994
(in thousands, except per share amounts) 1996
1995 1994
(Restated) (Restated)
Revenues:
Premiums written $30,350
$33,832 $34,916
Decrease (increase) in unearned 1,765
(1,392) (2,345)
premiums
Gross premium income 32,115
32,440 32,571
Less reinsurance ceded (11,689)
(12,627) (13,267)
Net premium income 20,426
19,813 19,304
Net investment income 2,087
2,236 2,878
Realized investment losses (160)
(120) (476)
Fees and other income 1,325
1,481 1,216
Total revenues 23,678
23,410 22,922
Benefits and expenses:
Death and other benefits 11,698
10,267 8,877
Amortization of deferred policy 10,134
10,154 10,388
acquisition costs costss
Operating expenses 5,380
5,808 6,716
Total benefits and expenses 27,212
26,229 25,981
Loss from continuing operations before
income
tax benefit (3,534)
(2,819) (3,059)
Income tax benefit (828)
(747) (546)
Loss from continuing operations (2,706)
(2,072) (2,513)
Discontinued operations:
Income from operations of
discontinued
businesses (net of income taxes) 587
471 1,035
Gain on disposal of discontinued
businesses (net of income taxes) 885
266
1,472
471 1,301
Loss before cumulative effect of change in
accounting principle (1,234)
(1,601) (1,212)
Cumulative effect of change in accounting
299
principle
Net loss ($1,234)
($1,601) ($913)
Income (loss) per common and common
equivalent share:
Loss from continuing operations ($1.20)
($0.96) ($1.10)
Discontinued operations 0.56
0.18 0.48
Loss before cumulative effect of
change in
accounting principle (0.64)
(0.78) (0.62)
Cumulative effect of change in
accounting
principle
0.11
Net loss ($0.64)
($0.78) ($0.51)
Weighted average number of shares 2,614
2,634 2,690
outstanding
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Capital
Net unrealized
in excess
appreciation
of
(depreciation)
(dollar amounts in thousands, Common Stock stated
Fixed Equity Retained Treasury stock Total
exceept per share amounts) Shares Amount value
maturities securities earnings Shares Amount amount
BALANCE, JANUARY 1, 1994 3,067 $31 $8,167
$567 $32 $7,230 (317) ($1,149) $14,878
Change in net unrealized
appreciation
of fixed
maturities and equity
securities for the year
(2,541) (10)
(2,551)
Preferred stock dividends
(412) (412)
Common stock dividends
($.05 per share)
(135) (135)
Accretion of difference
between fair value and
mandatory redemption
value of preferred stock
(36) (36)
Purchase of treasury shares
(71) (226) (226)
Retirement of treasury shares (6) (38)
6 38
Net loss for the year
(913) (913)
BALANCE, DECEMBER 31, 1994 3,061 31 8,129
(1,974) 22 5,734 (382) (1,337) 10,605
Change in net unrealized
appreciation
(depreciation) of fixed
fixed maturities and
equity securities for
the year
2,648 9 2,657
Preferred stock dividends
(409) (409)
Accretion of difference between
fair value and mandatory
redemption value of
preferred stock
(36) (36)
Purchase of treasury shares
(58) (202) (202)
Retirement of treasury shares (30) (1) (113)
30 114
Net loss for the year
1,601 (1,601)
BALANCE, DECEMBER 31, 1995 3,031 30 8,016
674 31 3,688 (410) (1,425) 11,014
Change in net unrealized
appreciation (depreciation)
of fixed maturities and
equity securities for
the year
(609) (26) (635)
Preferred stock dividends
(409) (409)
Accretion of difference
between fair value and
and mandatory redemption
value of preferred stock
(36) (36)
Purchase of treasury shares
(10) (50) (50)
Retirement of treasury shares (10) (50)
10 50
Net loss for the year
(1,234) (1,234)
BALANCE, DECEMBER 31, 1996 3,021 $30 $7,966
$65 $5 $2,009 (410) ($1,425) $8,650
See notes to consolidated financial statements
CONSUMERS FINANCIAL
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CASH FLOWS
YEARS ENDED DECEMBER 31, 1996,
1995 AND 1994
(in thousands) 1996
1995 1994
Cash flows from operating activities
Net loss ($1,234)
($1,601) ($913)
Adjustments to reconcile net loss to cash
provided by (used in) operating
activities:
Deferred policy acquisition costs (8,987)
(11,005) (10,647)
incurred
Amortization of deferred policy 11,964
10,734 19,663
acquisition costs
Other amortization and depreciation 433
613 817
Change in future policy benefits 454
2,063 (14,493)
Change in unearned premiums (1,765)
1,392 2,982
Amounts due reinsurers 2
(86) 2,147
Income taxes (22)
(318) (721)
Change in receivables 4,721
3,805 (20,230)
Change in other liabilities (695)
(117) 600
Cumulative effect of change in
accounting principle
(299)
Other (38)
81 (875)
Total adjustments 6,067
7,162 (21,056)
Net cash provided by (used in) operating 4,833
5,561 (21,969)
activities
Cash flows from investing activities:
Purchase of investments (13,140)
(9,657) (14,180)
Maturity of investments 6,484
7,027 9,035
Sale of investments 6,598
2,190 31,886
Purchase of property and equipment (24)
(371) (1,104)
Net cash provided by (used in) investing (82)
(811) 25,637
activities
Cash flows from financing activities:
Principal payments on debt (2,537)
(852) (1,295)
Receipts from universal life and investment 4,775
4,938 7,256
products
Withdrawals on universal life and (6,425)
(9,029) (8,547)
investment products
Purchase of treasury stock, including 8
1/2%
redeemable preferred stock (50)
(201) (265)
Cash dividends to shareholders (409)
(409) (546)
Net cash used in financing activities (4,646)
(5,553) (3,397)
Net increase (decrease) in cash 105
(803) 271
Cash at beginning of year 451
1,254 983
Cash at end of year $556
$451 $1,254
Supplemental disclosures of cash flow
information:
Cash paid (received) during the year for:
Interest $255
$305 $319
Income taxes $154
$75 $1,104
See notes to consolidated financial statements
CONSUMERS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business
Consumers Financial Corporation is an insurance holding company
which, through
its subsidiaries, is a leading provider of credit life and
credit disability insurance in the Middle Atlantic region of the
United States.
Basis of financial statements
The financial statements have been prepared on the basis of
generally
accepted accounting principles (GAAP) which, as to the life
insurance
company subsidiaries, vary from reporting practices prescribed or
permitted by
regulatory authorities. Certain prior year amounts have been
reclassified to conform with classifications used for 1996.
Principles of consolidation
The consolidated financial statements include the accounts
of Consumers
Financial Corporation (the Company) and its wholly-owned
subsidiaries, the most significant of which are Consumers Life
Insurance
Company (Consumers Life), Interstate Auto Auction, Inc.
(Interstate) and
Consumers Car Care Corporation. Consumers Life Insurance Company
of North
Carolina, Investors Fidelity Life Assurance Corp. and Consumers
Reinsurance Company are subsidiaries of Consumers Life. All
material
intercompany accounts and transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with
generally
accepted accounting principles requires management to make
estimates
and assumptions that affect the amounts reported in the financial
statements
and accompanying notes. Actual results could differ from these
estimates.
Investments
Fixed maturities includes bonds, notes and certificates of
deposit
maturing after one year. Management determines the
appropriate
classification of bonds and notes at the time of purchase and
reevaluates such
designation as of each balance sheet date. These securities are
classified as held-to-maturity when the Company has the positive
intent and
ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost. All other bonds and
notes are
classified as available-for-sale. Available-for-sale securities
are
carried at fair value, with the unrealized gains and losses, net
of income
taxes, reported as a separate component of shareholders equity.
The
amortized cost of securities in this category is adjusted for
amortization of
premiums and accretion of discounts to maturity. All
certificates
of deposits maturing after one year are deemed to be held to
maturity. Equity
securities (common and non-redeemable preferred stocks) held by
the
insurance subsidiaries are stated at fair value.
Mortgage loans on real estate are carried at the unpaid
principal
balance. Investment real estate is carried at the lower of
cost or fair
value. Policy loans are carried at their unpaid balance. Other
invested
assets, excluding real estate partnerships, and short-term
investments
are carried at cost. Investments in real estate partnerships are
reported at
equity.
Interest on fixed maturities and short-term investments is
credited to
income as it accrues on the principal amounts outstanding,
adjusted
for amortization of premiums and discounts computed by the
interest method.
Dividends are recorded as income on the ex-dividend dates. Loan
origination and commitment fees are amortized, using the interest
method, over
the life of the mortgage loan. The accrual of interest on
mortgage
loans is generally discontinued when the full collection of
principal is in
doubt, or when the payment of principal or interest has become
contractually 90 days past due.
Realized gains and losses and provisions for permanent
losses on
investments are included in the determination of operating
income. Net
unrealized appreciation or depreciation of debt securities and
preferred and \
common stocks, which represents the difference between fair value
and aggregate cost, is included in a separate shareholders'
equity account.
The "specific identification" method is used in determining the
cost
of investments sold.
Fair values of financial instruments
The following methods and assumptions were used by the
Company in
estimating its fair value disclosure for financial
instruments:
Cash and short-term investments: The carrying amounts
reported in the
balance sheet for these instruments approximate their fair
values.
Investment securities: Fair values for fixed maturity
securities are
based on quoted market prices, where available. For fixed
maturity
securities not actively traded, fair values are estimated using
values
obtained from independent pricing services or, in the case of
private
placements, are estimated by discounting expected future cash
flows using a
current market rate applicable to the yield, credit quality and
maturity of the investments. The fair values for equity
securities are based
on quoted market prices and are recognized in the balance sheet
(see
Note 6).
Mortgage loans and real estate and policy loans: The fair
values for
mortgage loans are estimated using discounted cash flow
analyses,
using interest rates currently being offered for similar loans to
borrowers
with similar credit ratings. Similarly, real estate fair values
are
estimated using discounted cash flow analyses. The carrying
amounts for
policy loans approximate their fair values.
Long-term debt: The carrying amount for long-term debt
approximates its
fair value.
Deferred policy acquisition costs
The costs of acquiring new business, including costs
incurred subsequent
to the year of issue in excess of the ultimate level costs,
principally commissions, certain sales salaries and those home
office expenses
that vary with and are primarily related to the production of new
business, have been deferred. Deferred acquisition costs
applicable to
individual life insurance, excluding universal life-type policies
and
investment products, were amortized over the premium-paying
period of the
related policies in the manner which will charge each year's
operations
in direct proportion to the estimated receipt of premium revenue
over the life
of the contracts. Premium revenue estimates are made using the
same interest, mortality and withdrawal assumptions as are used
for computing
liabilities for future policy benefits. Deferred policy
acquisition
costs related to universal life-type policies and investment
products are
amortized in relation to the present value of expected gross
profits on
the policies. Acquisition costs relating to single premium
credit insurance
are being amortized so as to charge each year's operations in
direct
proportion to premiums earned.
Property and equipment and depreciation
Property and equipment are stated at cost. Depreciation is
being
provided on the straight-line method over the estimated
useful lives of
the assets.
Other real estate
Real estate is carried at the lower of cost or fair value.
Intangibles
Costs in excess of underlying net assets of acquired
companies and
acquired intangible assets are being amortized over the
estimated periods
expected to benefit (5 - 40 years) using the straight-line and
other methods
which provide periodic charges to operations proportionate to the
anticipated benefits to be received. These intangible assets are
periodically
reviewed for impairment, based on an assessment of future
operations, to ensure that they are appropriately valued.
Future policy benefits
The liability for future policy benefits for individual life
insurance has
been provided on a net level premium method based on estimated
investment yields, withdrawals, mortality and other assumptions
which were
appropriate at the time the policies were issued. Such estimates
were
based upon industry data and the Companies' past experience, as
adjusted to
provide for possible adverse deviation from the estimates.
Benefit
reserves for universal life products represent policy account
balances before
applicable surrender charges plus certain deferred policy
initiation
fees that are recognized in income over the term of the policies.
Unearned premiums
Unearned premiums for credit life and disability insurance
contracts
have been computed based upon the original and remaining
term of the
related policies as follows: decreasing term credit life on the
Rule of 78's
method, level term credit life using the Pro Rata method and,
effective January 1, 1994, credit disability using a 65% - 35%
weighted
average of the Rule of 78's and Pro Rata methods. (see Note 3).
Recognition of premium revenue and related costs
For individual life insurance contracts, excluding
universal life-type
policies and investment products, premiums are recognized
as revenue
over the premium-paying period. Future benefits and expenses are
associated
with earned premiums, so as to result in recognition of profits
principally over the premium-paying period. This association is
accomplished
by means of the provision for liabilities for future benefits and
the deferral and amortization of acquisition costs. Provisions
are also made
for the risk of adverse deviation from the reserve assumptions
over
the lives of the contracts. Revenues for universal life-type
policies and
investment products consist of policy charges for the cost of
insurance,
policy administration, and surrenders assessed during the period,
and expenses
include interest credited to policy account balances and
benefit claims incurred in excess of policy account balances.
For credit
insurance, premiums are earned over the terms of the policies, as
discussed above. Policy and contract claims include provisions
for claims
reported and claims incurred but not reported. The Company
believes
that the liabilities for claims and related expenses are
adequate.
Anticipated investment income is considered in determining
whether future
earned premiums on existing credit insurance will be sufficient
to cover the
present value of future benefits and maintenance expenses and to
recover the unamortized portion of deferred policy acquisition
costs.
Income taxes
The Company and its subsidiaries provide income taxes, for
financial
reporting purposes, on the basis of the liability method as
required by
Statement of Financial Accounting Standards No. 109.
New Accounting Standards
The Company adopted Statement of Financial Accounting
Standards No.
123, Accounting for Stock-Based Compensation (SFAS 123),
in 1996.
Under the provisions of SFAS 123, companies can elect to account
for stock-
based compensation plans using a fair-value based method or
continue
measuring compensation expense for those plans using the
intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related
Interpretations. The Company has elected to continue using the
intrinsic value
method to account for its stock-based compensation plans. SFAS
123 requires
companies electing to continue using the intrinsic value method
to
make certain pro forma disclosures (see Note 16).
Statement of Financial Accounting Standards No. 121,
Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets
to be
Disposed Of (SFAS 121), was adopted as of January 1, 1996. SFAS
121
standardized the accounting practices for the recognition and
measurement of
impairment losses on certain long-lived assets. The adoption of
SFAS 121 had
no material effect on the Company s results of operations or
financial position.
2. BASIS OF FINANCIAL STATEMENTS
The more significant GAAP applied in the preparation of the
financial
statements that differ from life insurance statutory
accounting
practices prescribed or permitted by regulatory authorities
(which are
primarily designed to demonstrate solvency) are as follows:
(a) Investments in securities of unaffiliated companies
are reported
as described in Note 1, rather than in accordance with
valuations
established by the National Association of Insurance
Commissioners (NAIC). Pursuant to NAIC valuations,
bonds eligible for
amortization are reported at amortized value; other
securities are
carried at values prescribed by or deemed acceptable
to the NAIC,
including common stocks, other than stocks of
affiliates, at
market value.
(b) Costs of acquiring new business are deferred and
amortized rather
than being charged to operations as incurred.
(c) The liability for future policy benefits and expenses
on
individual life insurance is based on conservative
estimates of expected
mortality, morbidity, interest, withdrawals, and
future
maintenance and settlement expenses, rather than on
statutory rates for
mortality and interest. For credit life insurance,
the liability
is based upon the unearned premium reserve, computed
as described in
Note 1, rather than on statutory rates for mortality
and
interest. The credit disability policy liability,
principally the unearned
premium reserve, is calculated as described in Note
1. Effective
January 1, 1994, the statutory liability is computed
using
predominantly the average of the Rule of 78's and Pro
Rata
methods. Prior to 1994, the statutory liability was
computed using
primarily the Pro Rata method.
(d) Deferred income taxes, if applicable, are provided as
described in
Note 17.
(e) The statutory liabilities for the interest maintenance
reserve and
asset valuation reserve, designed to lessen the impact on
surplus
of market fluctuations of securities and mortgage loans,
have not
been provided in the financial statements.
(f) Certain assets are reported as assets rather than being
charged directly
to surplus and excluded from the balance sheets.
(g) Commission allowances pertaining to financing-type
reinsurance
agreements are not included in results of operations.
(h) Loan origination fees are deferred and recognized
over the life of
the applicable mortgage as an adjustment of yield rather
than being
reported in income as received.
(i) Revenues for universal life-type policies and
investment products
consist of policy charges primarily for the cost of
insurance rather
than premiums due and/or collected on such policies.
Expenses
include interest credited to policy account balances
and benefit claims
incurred in excess of policy account balances rather
than the
increase in benefit reserves and gross benefit claims
incurred for
these
types of policies.
Dividends and other distributions to the Company from
Consumers Life
are limited in that Consumers Life is required to maintain
minimum
capital and surplus in each of the states in which it is
licensed, determined
in accordance with regulatory accounting practices. The amount
of
minimum capital and surplus required is $5.5 million. All
distributions are
further limited by Delaware state insurance laws to the greater
of
previous year earnings, computed in accordance with statutory
accounting
principles, or 10% of statutory capital and surplus as of the end
of the
previous year. In some instances such payments may require the
prior approval
of the insurance department. Accordingly, based on amounts
reported
to regulatory authorities, at December 31, 1996, approximately
$8.6 million of
Consumers Life's net assets cannot generally be transferred to
the
parent company and $585,000 is available for transfer during 1996
as long as
the minimum capital and surplus requirements mentioned above are
maintained. Also, any loans or advances to the parent company of
a material
amount must be reported to the insurance department. The Company
may
have limited cash funds available to pay dividends in excess of
amounts
transferred from subsidiaries. In addition, separate
restrictions apply
to the surplus note owed to the Company by a subsidiary of
Consumers Life.
Payment of interest and repayment of principal on the note are
permitted by the applicable state insurance department as long as
the
subsidiary's statutory capital and surplus exceeds $3 million.
The reported statutory capital and surplus of the life
insurance
subsidiaries was $5.9 million at December 31, 1996 and $7.1
million at
December 31, 1995. After reflecting the impact of both the
disallowed
reinsurance treaty and the excess subsidiary investments
discussed in Note
20, the statutory capital and surplus of the life insurance
subsidiaries at
December 31, 1995 would have been $4.6 million. The insurance
companies combined statutory net income was $29,000 in 1996. In
1995, the
companies reported a combined net loss of $3,589,000, and in
1994
they reported net income of $477,000.
Insurance laws require that certain amounts be deposited
with various
state insurance departments for the benefit and protection
of
policyholders. The approximate carrying amount of such deposits
at both
December 31, 1996 and 1995 was $5.3 million.
After receiving consent from the Delaware Insurance
Department, the
Company adopted, for statutory reporting purposes, an
accelerated method
of reserving disability unearned premiums. The change allows the
Company
to recognize revenue in a manner which more appropriately matches
its
incidence of claims. In addition to the use of this unearned
premium method,
the insurance subsidiaries have also requested and received
approval
from their respective domiciliary states to carry as an admitted
asset a
receivable for credit insurance premiums, net of commissions,
which have
been collected by the companies agents but have not yet been
remitted to the
companies. At December 31, 1996 and 1995, the premiums in process
of
collection receivable totaled $1.8 million and $2 million,
respectively.
3. ACCOUNTING CHANGES
As of January 1, 1994, the Company changed its method of
earning credit
disability premiums for a substantial portion of its credit
disability business. The method used prior to 1994 was computed
based on the
average of the Rule of 78's and the Pro Rata methods, while the
new
method utilizes a weighted average of those two methods, based on
65% of the
Rule of 78's method and 35% of the Pro Rata method. The new
weighted
average method accelerates the premium earning pattern and
provides a better
matching of earned premiums with the incidence of incurred
disability
claims based on the Company s actual experience. The Company s
method of
amortizing deferred policy acquisition costs for credit
disability
business was also revised in proportion to the change in earned
premiums.
The cumulative effect of this change on years prior to 1994
has been
included in results of operations for 1994. This change
reduced the
1994 net loss by $299,000 ($.11 per share).
4. PENDING MERGER
Because of the recurring losses in the Company s core
credit insurance
business, in early 1996, the Company began evaluating
alternatives to
best serve the interests of its shareholders. The Company
considered several
alternatives, including the following: (1) the sale of its
insurance
operations, (2) the sale of its credit insurance marketing
organization (with
retention and ongoing administration of inforce business), (3)
the
sale of its auto auction business, (4) the sale of the Company,
(5) the
reorganization of the Company or (6) the combination of the
Company with
another organization in the same or other lines of business.
In January 1996, the Company engaged a financial advisor to
assist in
evaluating the many alternatives to maximize shareholder
value. In
February 1996, the Company began soliciting bids for both its
credit and
universal life insurance operations and its auto auction
business. From
March until May 1996, 12 offers were received to buy the Company
or segments
of the Company, including one from LaSalle Group, Inc. (LaSalle),
an
investment management firm, which was structured as a cash
merger. Following
the completion of due diligence reviews and the submission of
revised offers by the four highest bidders, the Company and its
financial
advisor reviewed and analyzed each offer. In October 1996,
management
recommended and advised the Company s Board of Directors to
accept the revised
offer from LaSalle.
On October 30, 1996, the Company entered into an Agreement
and Plan of
Merger with LaSalle and Consumers Acquisition Corp.
("CAC"), whereby
CAC will be merged with and into the Company (the "Merger"). As
the surviving
corporation in the Merger, the Company will become a wholly-owned
subsidiary of LaSalle. The Merger is subject to, among other
things, the
approval of insurance regulators in the four states in which the
Company's insurance subsidiaries are domiciled. The Company s
common
shareholders approved the Merger at a Special Meeting held on
March 25,
1997. The Agreement and Plan of Merger provides that the holders
of the
Company's outstanding common stock will receive cash in the
amount of
$3.92 per share, subject to certain adjustments. The Company's
Preferred
Stock will remain outstanding following the Merger, and the
holders
thereof will retain all of the rights and preferences which
currently exist
for such stock.
5. DISCONTINUED OPERATIONS
In late September 1996, the Company finalized a plan to
dispose of the
business and the related operating assets of Interstate as
part of an
overall plan to merge or otherwise combine its core insurance
operations with
those of another insurance company. On November 6, 1996, the
Company sold Interstate s auto auction business and all of its
property, plant
and equipment and inventories to ADESA Pennsylvania, Inc., an
unrelated third party, for cash of $4.85 million. The sale
resulted in a
fourth quarter after-tax gain of approximately $1.8 million. The
gain on
disposal includes a loss from operations of $84,000 from
September 30, 1996 (
the measurement date) to December 31, 1996, less an income tax
benefit of $28,000.
Accordingly, in the accompanying financial statements,
Interstate s
operating results have been reported as discontinued
operations for all
periods presented. Interstate s non-operating net assets,
principally cash,
receivables, investments and trade payables, were retained by the
Company.
In March 1997, the Company signed a Recapture Agreement to
reinsure its
remaining block of individual life insurance business back
to the
direct writer of the business (see Note 21). The Recapture
Agreement provides
that the direct writer will pay the Company a recapture
consideration equal to $1.05 million in exchange for the transfer
by the
Company of assets in an amount equal to the net statutory policy
reserves
for this business. Based upon the recapture consideration to be
received,
the transaction will result in an after-tax loss of approximately
$900,000. This loss has been reflected in the Company s 1996
financial
statements.
The Company had previously sold a substantial portion of
its direct and
assumed universal life business to an unaffiliated company.
The
business written on a direct basis was coinsured to the acquiring
company.
The assumed business was transferred to the purchaser with
approval of
the direct writing company and with no recourse to the Company in
the event
the purchaser is unable to fulfill its obligations under the
reinsurance agreement. These transactions, which took place on
December 30,
1994, resulted in the transfer of $32.7 million in policy
liabilities
and $24.1 million in cash, mortgage loans and policy loans to the
purchaser.
In addition, $7.7 million in deferred policy acquisition costs
were
written off. The sale produced a pre-tax gain of $895,000, which
was
partially offset by a $492,000 loss on the sale of investments
necessary to
close on the transaction.
Accordingly, in the accompanying financial
statements, the operating results of the Company s individual
life insurance
business have been
reported as discontinued operations for all periods presented.
A summary of the results of operations of the discontinued
segments is
presented below:
1996
Individual
Life Auto
(in thousands)
Insurance Auction Total
Revenues
$4,349 $2,688 $7,037
Income from operations before
income tax expense
$393 $554 $947
Income tax expense
134 226 360
Income from operations
259 328 587
Gain (loss) on disposal before income
tax expense (benefit)
(1,385) 3,031 1,646
Income tax expense (benefit)
(471) 1,232 761
Gain (loss) on disposal
(914) 1,799 885
Income (loss) from discontinued operations
($655) $2,127 $1,472
1995
Individual
Life Auto
(in thousands)
Insurance Auction Total
Revenues
$5,781 $3,221 $9,002
Income from operations before
income tax expense
$83 $732 $815
Income tax expense
28 316 344
Income from discontinued operations
$55 $416 $471
1994
Individual
Life Auto
(in thousands)
Insurance Auction Total
Revenues
$8,517 $3,304 $11,821
Income from operations before
income tax expense
$1,135 $478 $1,613
Income tax expense
386 192 578
Income from discontinued operations
749 286 1,035
Gain on disposal before income
tax expense
403 403
Income tax expense
137 137
Gain on disposal
266 266
Income from discontinued operations
$1,015 $286 $1,301
At December 31, 1996 and 1995, the remaining net assets of
the
discontinued individual life insurance segment consisted of
the
following:
December 31
(in thousands)
1996 1995
Invested assets
$8,576 $7,787
Accrued investment income and receivables
135 218
Deferred policy acquisition costs
2,535 4,284
Future policy benefits and other policy
(11,246) (10,743)
liabilities
Net assets
$0 $1,546
At December 31, 1995, the net assets of the discontinued
auto auction
business consisted of $1.8 million in property and
equipment and
$84,000 in inventories.
6. INVESTMENTS AND INVESTMENT INCOME
Investments, which are valued for financial statement
purposes as
described in Note 1, consist of the following at December
31, 1996:
Quoted or Balance
Amortized
estimated sheet
(in thousands) cost
fair value amount
Fixed maturities:
Bonds:
United States government and
government
agencies and authorities $25,650
$25,889 $25,889
Foreign governments 287
298 298
Public utilities 3,979
3,868 3,868
All other 12,399
12,358 12,358
42,315
42,413 42,413
Certificates of deposit 205
205 205
Total fixed maturities 42,520
42,618 42,618
Mortgage loans on real estate 2,286
2,425 2,286
Policy loans 518
518 518
Other invested assets 1,861
1,931 1,866
Short-term investments 3,901
3,901 3,901
Total investments $51,086
$51,393 $51,189
A portion of the Company's invested funds is restricted as
to use.
Deposits are required with various state insurance
departments for the
benefit and protection of policyholders (see Note 2).
At December 31, 1996 and 1995, no mortgage loans or other
loans were
considered to be non-performing loans.
At December 31, 1996, approximately 81% of the Company's
investments in
mortgage loans were secured by commercial real estate and
the
remaining mortgage loans were secured by residential real estate.
Approximately 73% of the loans involved properties located in
Central
Pennsylvania. Such investments consist principally of first
mortgage liens
on completed income-producing properties, primarily office
buildings .
One mortgage loan exceeded 10% of shareholders equity at
December 31, 1996,
and two mortgage loans exceeded 10% of shareholders equity at
December 31, 1995. The Company s mortgage loan valuation
reserve at December
31, 1996 and 1995 was $100,000.
Accumulated depreciation on investment real estate amounted
to $51,000
at December 31, 1995. At December 31, 1996, all the Company
s real
estate is classified as non-investment real estate, since the
Company intends
to sell these properties. Accumulated depreciation on the
properties
at the time they were reclassified totaled $22,663.
Net investment income is applicable to the following
investments:
Years ended
December 31,
(in thousands) 1996
1995 1994
Interest:
Fixed maturities $2,364
$2,175 $2,773
Mortgage loans 421
692 2,138
Policy loans 33
58 250
Other invested assets 59
38 117
Short-term investments 223
186 168
Real estate income 157
332 177
3,257
3,481 5,623
Less investment expenses (680)
(702) (649)
Total net investment income 2,577
2,779 4,974
Less net investment income attributable to
discontinued operations 490
543 2,096
Net investment income attributable to
continuing operations $2,087
$2,236 $2,878
The amortized cost and estimated fair values of investments
in debt
securities at December 31, 1996 and 1995 are as follows:
1996
Gross Gross Estimate
d
Available for sale Amortize
unrealiz unrealiz fair
d
ed ed
(In thousands) cost
gains losses value
U.S. Treasury securities and
obligations of
U.S. government corporations and $24,749
$409 $139 $25,019
agencies
Corporate securities 16,665
121 262 16,524
Mortgage-backed securities 901
2 33 870
Totals $42,315
$532 $434 $42,413
1995
Gross Gross Estimate
d
Available for sale Amortize
unrealiz unrealiz fair
d
ed ed
(In thousands) cost
gains losses value
U.S. Treasury securities and
obligations of
U.S. government corporations and $17,492
$794 $12 $18,274
agencies
Corporate securities 15,354
303 68 15,589
Mortgage-backed securities 972
6 2 976
Totals $33,818
$1,103 $82 $34,839
The amortized cost and estimated fair value of debt
securities at
December 31, 1996, by contractual maturity, are shown
below. Expected
maturities will
differ from contractual maturities because borrowers may have the
right to
call or prepay obligations with or without call or prepayment
penalties.
Amortized Estimated
(in thousands)
cost fair value
Due in 1997
$4,896 $4,910
Due in 1987 - 2002
26,466 26,673
Due in 2003 - 2007
8,459 8,395
Due after 2007
1,593 1,565
41,414 41,543
Mortgage-backed securities
901 870
Totals
$42,315 $42,413
Proceeds from sales of investments in debt securities and
assets held
for sale during 1996 were $4.1 million. Gross gains of
$6,000 and
gross losses of $20,000 were realized on those sales. Proceeds
from such
sales in 1995 were $4.1 million. Gross gains of $3,000 and gross
losses
of $29,000 were realized on those sales. Proceeds from sales in
1994 were
$9.6 million. Gross gains of $41,000 and gross losses of $38,000
were
realized on those sales.
A summary of the consolidated net realized gains (losses)
and the change
in the difference between cost and quoted or estimated fair
value
for fixed maturity investments is as follows:
Change in the
Net
difference between
realized
amortized cost and
investment
quoted or
estimated
(in thousands) gains
fair value Total
(losses)
1996
Fixed maturities ($14)
($923) ($937)
Tax effect
314 314
Totals ($14)
($609) ($623)
1995
Fixed maturities ($26)
$2,995 $2,969
Tax effect
(347) (347)
Totals ($26)
$2,648 $2,622
1994
Fixed maturities $3
($2,833) ($2,830)
Tax effect
292 292
Totals $3
($2,541) ($2,538)
Realized gains and losses in the years ended December 31,
1996, 1995 and
1994 also arose from the sale of other investments.