The Company is a holding company, which through its subsidiaries, specializes in meeting the accident and health insurance needs of individuals and small to mid-sized businesses and the health and life insurance needs of Americans age 65 and older. In 1998, 1997 and 1996 the Company's business was conducted primarily through its then principal operating subsidiary, Central.
Reinsurance assumed represents Central's 100% portion of a block of group health business under a reinsurance agreement entered into in August of 1998 with UBL. The reinsurance ceded amount represents 80% of the above-mentioned block (Central's final retention is 20%) plus 50% of Central's group health business in force at December 31, 1997.
Net investment income increased to $7,454,180, or 14%, in 1998 from $6,527,537 in 1997. The primary reason for the increase was the interest earned on funds received from the July Equity Financing.
Other income for 1998 was $1,096,690, which consisted of fees for Central servicing the reinsurance assumed. The amortization of deferred reinsurance gain represents Central's portion of the $20 million ceding commission paid by Hannover for the UBL block of group health policies in August 1998.
The benefits, claims, losses and settlement expenses of $116,058,675 for 1998 is 72% of net premiums compared to $210,776,366, or 81%, for 1997. The decrease in 1998 was due to the Central reinsurance agreements. The lower loss ratio of 72% is a combination of reinsurance ceded, rate renewal actions, and managed care programs and benefits changes.
Underwriting, acquisition and insurance expenses, in total, were lower in 1998 compared to 1997 because of the reinsurance allowances as indicated in Note I to the consolidated financial statements. Before reinsurance expenses and allowances, commissions were $36,853,066, up 4% from $35,525,925 in 1997 primarily due to an increase in new business and commission rates; salaries and benefits in 1998 were $15,717,718, down 13% from $18,112,730 in 1997 due to the reduction in staff during the first half of the year and the discontinuance of Central's contribution to the pension plan. Other operating expense increased to $22,450,200, up 52% from $14,758,817 in 1997. The major reason for the increase was the cost of outsourcing the Company's computer operations for approximately $5.0 million, including Year 2000 costs, a provision of approximately $1.5 million taken in connection with a UBL note receivable, and a $1.5 million expense related to a fraud committed in connection with claims administration at the UBL facility.
The $647,271 amortization of deferred acquisition costs in 1998 is primarily the amortization of Central's portion of the ceding commission paid for the UBL block of group health policies.
The net loss for 1998 was $3,835,659, or $.49 per share, compared to a net loss of $20,956,356, or $5.01 per share, for 1997. The Company's revenues, before reinsurance, increased approximately $5,000,000. Although benefits, losses and expenses were reduced as a result of the reinsurance agreements, Central implemented certain policy benefit and managed care changes along with premium rate increases.
Although the Company reported a loss for 1998, a provision for federal income taxes of $1,066,888 was required principally due to the tax treatment related to the reinsurance transactions effective in 1998. For further information concerning the provision for income taxes, as well as information regarding differences between effective tax rates and statutory tax rates, see Note G of the Notes to Consolidated Financial Statements.
Total expenses for the group life and health segment in 1998 were $167,000,000 compared to $283,000,000 for 1997. The decrease in expenses in 1998 is also primarily related to the reinsurance agreements. Claims and losses ceded plus commission and expense allowances account for approximately $141,000,000 of the decrease. This decrease was offset by reinsurance commissions and expenses paid of approximately $14,000,000, an approximate $4,000,000 increase in new claims and $5,000,000 in costs for outsourcing the computer operations.
Revenues for the corporate and other segment were $500,000 in 1998, compared to $200,000 in 1997. The increase in revenue is related to interest income earned on proceeds received from the July Equity Financing. Expenses increased to $3,700,000 in 1998, from $1,700,000 in 1997. The increase in expense is related to (1) interest expense incurred in 1998 on the Bridge Loan, which was outstanding from December 1997 through July 1998, (2) $850,000 in stock based compensation expenses incurred related to 1998 employment agreements with key employees, and (3) an increase in legal and consulting expenses of approximately $300,000, which resulted from various business strengthening projects initiated by new management.
The majority of the Company's assets are in investments, which were $89,826,188 after a net unrealized holding gain (before taxes of $564,528) of $1,660,376, or 50% of the total assets at December 31, 1998. Fixed maturities are the primary investment of the Company and were $89,731,756 or 99% of total investments at December 31, 1998. Other investments consist of policy loans. The Company is carrying fixed maturities of
The Credit Agreement contains financial and other covenants with respect to the Company that, among other matters: (1) prohibit the payment of cash dividends on the Shares, except upon compliance with certain conditions; (2) restrict the creation of liens and sales of assets; and (3) require that the Company maintain (a) a leverage ratio (consolidated debt to consolidated total capital) of 0.50 to 1.00 through December 31, 1999, 0.45 to 1.00 thereafter through December 31, 2000, 0.40 to 1.00 thereafter through December 31, 2001, and 0.35 to 1.00 thereafter, (b) an interest coverage ratio (consolidated EBITDA to consolidated interest expense) of 2.0 to 1 through December 31, 1999, 2.5 to 1 through December 31, 2000, and 3.0 to 1 thereafter, (c) a minimum risk-based capital ratio for any regulated insurance company subsidiary of the Company of not less than 125%, and (d) a minimum consolidated net worth of $35.0 million through December 31,1999, $40.0 million thereafter through December 31, 2000, $50.0 million thereafter through December 31, 2001, $60.0 million thereafter through December 31, 2002, and $70.0 million thereafter. In addition, the Company has pledged the common stock of Continental General Corporation, the parent of CGIC, Central and other insignificant subsidiaries as security for the Credit Agreement.
The Company believes that cash flow from operating activities will be sufficient to meet its currently anticipated operating and capital expenditure requirements. If additional funds are required for long-term growth, the Company believes that these funds could be obtained through equity or debt offerings as market conditions permit or dictate. There is no assurance that the Company will be able to obtain such financing on terms that are favorable to the Company.
Legal/Regulatory Risk is the risk that changes in the legal or regulatory environment in which an insurer operate will create additional expenses not anticipated by the insurer in pricing its products. That is, regulatory initiatives designed to reduce insurer profits or otherwise affecting the industry in which the insurer operates, new legal theories or insurance company insolvencies through guaranty fund assessments, may create costs for the insurer beyond those recorded in the financial statements. Central attempts to mitigate this risk by offering a wide range of products and by operating in 36 states, thus reducing its exposure to any single product of non-Federal jurisdiction, and also by employing underwriting practices which identify and minimize the adverse impact of this risk.
Credit Risk is the risk that issuers of securities owned by Central will default or that other parties, including reinsurers that have obligations to Central, will not pay or perform. Central attempts to minimize this risk by adhering to a conservative investment strategy and by maintaining sound reinsurance and credit and collection policies.
The Company is devoting significant resources throughout its business operations to minimize the risk of potential disruption from the Year 2000 ("Y2K") issue. This issue is a result of computer programs having been written using two digits (rather than four) to define the applicable year. Any information technology ("IT") systems that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations and system failures. The issue also extends to many "non-IT" systems, such as operating and control systems that rely on embedded computer chips. In addition, like every other business enterprise, the Company is at risk from Y2K failures on the part of its major business counterparts, including suppliers, distributors, licensees and manufacturers, as well as potential failures in public and private infrastructure services, including electricity, water, gas, transportation and communications.
System failures resulting from the Y2K issue could adversely affect operations and financial results in all of the Company's business segments. Failures may affect such routine but important operations as billing and collection, payroll operations and daily administration of policyholder claims. The Company also has business relationships with agents and health providers, such as hospitals and physicians across the nation. These agents and businesses are themselves reliant on IT and embedded computer chips to conduct their operations.
Phase 1 -- Assessment. The Company has fully completed its assessment of all systems that could be significantly affected by Y2K. The completed assessment indicated that most of Central's significant IT systems could be affected. Based on the recent assessments, the Company determined that it will be required
The Company in conjunction with an outside vendor has performed an assessment of the IT applications critical to the processing of the UBL block of business. The Company has developed a detailed plan relative to transition of these policies and processing to the systems and anticipates such transition will be completed in the second and third quarter of 1999.
The Company has performed an assessment of the IT strategy relative to its recent acquisitions of PALHIC and CGIC. Critical systems processing the business applications of PALHIC are processed on systems with an independent outside vendor. A review of the independent outside vendor's Y2K plan has been performed and the review indicated the plan is underway and many of the Y2K issues have been resolved. The remaining Y2K issues are scheduled to be completed and compliance achieved by June 1999.
Phase 3 -- Implementation. The implementation phase involves creating detailed project plans, marshaling necessary resources and executing the strategies chosen. Central's business application software was sent off-site for Y2K conversion, which has been completed. Other Central software and hardware are in the stage of being upgraded or replaced. All upgrades are scheduled for completion by July 31, 1999.
Phase 4 -- Testing and Certification. This phase includes establishing a test environment, performing system testing and certifying the results. All mid-range and mainframe applications are being tested using data from production systems. The Company cannot estimate precisely when the testing phase will be completed due to the Company's reliance on the use of an outside vendor for these systems. However, the Company estimates that all testing should be completed by July 31, 1999 and certified by September 30, 1999.
The Company will utilize both internal and external resources to reprogram or replace, test and implement the software and operating equipment for Y2K modifications.
The outside vendor is also developing a contingency plan to support the customers of the back office functions. PALHIC and CGIC have developed contingency plans to support their systems and customers.
The nature and focus of the Company's efforts to address the Y2K problem may be revised periodically as interim goals are achieved or new issues are identified. In addition, it is important to note that the description of the Company's efforts necessarily involves estimates and projections with respect to activities required in the future. These estimates and projections are subject to change as work continues, and such changes may be substantial.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. The Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Company expects to adopt the new Statement effective January 1, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company does not anticipate that the adoption of this Statement will have a significant effect on its results of operations or financial position.
- the Company's ability to develop, distribute and administer competitive products and services in a timely cost-effective manner;
- the costs of defending litigation and the risk of unanticipated material adverse outcomes in such litigation, including the litigation with the Internal Revenue Service;
- the performance of others on whom the Company relies for reinsurance;
We have audited the consolidated balance sheet of Ceres Group, Inc. and subsidiaries (formerly Central Reserve Life Corporation) as of December 31, 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. We have also audited the information presented in the supplemental schedules as of and for the year ended December 31, 1998. These consolidated financial statements and supplemental schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and supplemental schedules based on our audit. The consolidated balance sheet of Ceres Group, Inc. and subsidiaries for the year ended December 31, 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years ended December 31, 1997, and the information presented in the supplemental schedules for those years were audited by other auditors, whose report dated February 20, 1998, except for Notes B and C, as to which the date was March 30, 1998, expressed an unqualified opinion on those statements and supplemental schedules and included an explanatory paragraph that expressed substantial doubt about the Company's ability to continue as a going concern, as discussed in Note C to these financial statements.
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 and the report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Ceres Group, Inc. and subsidiaries, at December 31, 1998 and 1997, and the results of its operations and cash flows for each of the three years ended December 31, 1998, in conformity with generally accepted accounting principles. Also in our opinion, the related supplemental schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We have audited the consolidated financial statements of Central Reserve Life Corporation and subsidiaries as of and for each of the years in the two-year period ended December 31, 1997 as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as of and for each of the years in the two-year period ended December 31, 1997 as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
The accompanying consolidated financial statements and financial statement schedules have been prepared assuming that the Company will continue as a going concern. As discussed in Note C to the consolidated financial statements, the Company has suffered substantial losses from operations in 1997 and 1996 that resulted in a significantly reduced net capital position. The Company has entered into an Amended and Restated Stock Purchase Agreement to issue and sell 7,300,000 Common Shares and warrants to purchase an additional 3,650,000 Common Shares at an exercise price of $5.50 per share for an aggregate purchase price of $40,150,000. The closing of the Amended and Restated Stock Purchase Agreement in subject to shareholder approval and regulatory approvals. In December 1997, the Company obtained an interim loan of $20 million and that loan is due June 30, 1998. Should the Amended and Restated Stock Purchase Agreement not be completed before June 30, 1998, and due to regulatory limitations on the Company's ability to receive dividends from its insurance subsidiary, the Company, absent some alternative capital resource, will not have the ability to repay the interim loan. These matters raise substantial doubt about the ability of the Company to continue as a going concern. Management's plans in regard to these matters are also described in Note C to the consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The accompanying consolidated financial statements include the accounts of Ceres Group, Inc. and its wholly-owned subsidiaries, including Central and Provident American Life and Health Insurance Company, collectively referred to herein as the "Company." All intercompany transactions have been eliminated in consolidation.
Premiums and discounts arising from the purchase of mortgage-backed securities are amortized using the interest method over the estimated remaining term of the securities, adjusted for anticipated prepayments.
The costs of acquiring and renewing traditional life insurance, principally commissions, are deferred and amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. In 1998, deferred acquisition costs also include amounts paid to acquire accident and health blocks of business via reinsurance (see Note I).
Liabilities for future policy reserves on ordinary life insurance have generally been provided on a net level premium method based upon estimates of future investment yield, mortality, and withdrawals using the Company's experience and actuarial judgment with an allowance for possible unfavorable deviation from the expected experience. Future policy benefits for annuity policies in the accumulation phase have been calculated based on the participant's aggregate account values. The liability for future policy benefit reserves has been computed using the following assumptions: (i) the guaranteed interest on policies currently being issued is 4.5%, and (ii) estimates of future mortality and withdrawals are based on experience and established industry tables.
Life premiums are recognized as revenue when they become due. Accident and health premiums are recognized as revenue over the terms of the policies. Amounts received from contracts which do not subject the Company to risks arising from policyholder mortality or morbidity, principally certain deferred and flexible annuity products, are not reflected in premium revenue; rather, such amounts are accounted for as deposits and are included in future policy benefits, losses and claims.
Basic earnings per share are computed by dividing the income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if common stock equivalents were exercised and shared in the earnings of the Company. Only those potential common shares which are dilutive are included in the computation of diluted earnings per share.
Certain amounts presented in the prior year's financial statements have been reclassified to conform to the current year's method of presentation.
In 1997 and 1996, the Company incurred net losses of approximately $21,000,000 and $9,300,000, respectively, which resulted in a significantly reduced net capital position. In addition, at December 31, 1997, it was not clear if shareholder approval would be granted for the Original Stock Purchase Agreement or New Stock Purchase Agreement described in Note B. If shareholder approval had not been granted, the Company would have been required to immediately obtain an alternate source of funding in order to repay the Bridge Loan and fund its operations. There was no assurance that such funding could have been obtained at all or on terms favorable to the Company. The failure to obtain such funding could have resulted in Strategic exercising its rights as a secured creditor, and foreclosing upon all the common shares of Central, which were pledged as collateral under the terms of the Bridge Loan. Such action would have made it impossible for the Company to continue operations and/or forced the Company to seek protection under federal bankruptcy law. These matters raised significant doubt at December 31, 1997 about the Company's ability to continue as a going concern.
As discussed in Note B, the New Stock Purchase Agreement was approved by shareholders, resulting in the Company's receipt of net proceeds of $37,675,000, enabling the Company to satisfy the Bridge Loan obligation and fund operations. In addition, as reported in the accompanying consolidated financial statements, the Company reported profitable operations in the third and fourth quarters of 1998. Accordingly, the matters
The fair value of assets acquired totaled $6,472,000, consisted principally of bonds and cash, and liabilities assumed of $967,000, which relate principally to premiums taxes payable.
Effective January 1, 1999, Reassurance Company of Hannover ("Hannover") assumed from PILIC 100% of its accident and health block of business. As of January 1, 1999, Central entered into a separate reinsurance agreement with Hannover, wherein Central assumed from Hannover 10% of the block acquired by Hannover from PILIC.
On February 17, 1999, the Company acquired 100% of the outstanding common stock of Continental General Corporation ("Continental") from the Western & Southern Life Insurance Company, a mutual life insurance company domiciled in Ohio. Continental is a holding company that primarily conducts business through its wholly-owned subsidiary, Continental General Insurance Company ("CGIC"), a life and accident and health insurer domiciled in Nebraska, licensed in 49 states. CGIC offers Medicare supplement and individual major medical products, distributed through independent agents. CGIC also offers long-term care, ordinary life, universal life, and annuity policies. CGIC has approximately $215,000,000 in premiums in 1998 and at December 31, 1998 had approximately $400,000,000 in assets and $37,000,000 in statutory capital and surplus. Total consideration paid by the Company for the common stock was approximately $84,500,000, and was financed through reinsurance, debt, cash, and an equity offering as described further below. This transaction will be accounted for in accordance with the purchase method.
Effective February 17, 1999, the Company entered into a series of stock subscription agreements with a group of investors, principally Strategic and Insurance Partners, wherein the Company issued 2,000,000 common shares at $7.50 per share for $15,000,000.
The amortized cost and estimated fair value of securities held-to-maturity and available-for-sale as of December 31, 1998, are as follows:
The amortized cost and estimated fair value of securities held-to-maturity and available-for-sale as of December 31, 1997, are as follows:
At December 31, 1998, Central and PALHIC had certificates of deposit and fixed maturity securities with a carrying value of $11,331,796 on deposit with various state insurance departments to satisfy regulatory requirements.
Significant components of property and equipment are stated at cost and are summarized as follows:
The Company files a consolidated federal income tax return with its subsidiaries, except PALHIC which is required to file a separate return for five years. The provision for federal income tax does not bear the customary relationship to pretax accounting income because of special tax provisions available to life insurance companies. Central receives a benefit provided for "small" life insurance companies.
Income tax expense attributable to income from operations differs from the amounts computed by applying the U.S federal income tax rate of 35%. Those effects are summarized as follows:
The federal income tax returns for the Company and its subsidiaries have been examined by the Internal Revenue Service ("IRS") for 1991 and 1992. During the third quarter of 1994, the IRS issued a proposal for adjustments to the Company's returns for 1991 and 1992. The proposed deficiencies were approximately $2,400,000 of which $215,303 was paid in 1994 and $590,000 paid in 1997. The balance of approximately $1,600,000 relates to whether or not the Company's subsidiary, Central, qualified as a life company for tax purposes. The Company is vigorously protesting the proposed deficiency. Based on discussions with counsel, management believes existing law supports the Company's position. Therefore, the Company has not recorded a liability for the difference.
At December 31, 1998, the Company has a tax net operating loss ("NOL") carryforward of approximately $2,500,000 for federal income tax purposes which expires through 2012. Future changes in ownership, as defined by sections 382 and 383 of the Internal Revenue Code, could limit the amount of NOL carryforwards used in any one year.
The Company determines a valuation allowance based on an analysis of amounts recoverable in the statutory carryback period and available tax planning strategies. In assessing the valuation allowance established at December 31, 1998 and 1997, estimates were made as to the potential financial impact on the Company of recent NOLs and the Company's financial condition described in Notes B and C. Management believes that the Company will generate sufficient future taxable income to realize the net deferred tax asset prior to the expiration of any NOLs and that the realization of a $1,409,479 net deferred tax asset is more likely than not.
In accordance with federal tax law, a portion of insurance companies' net income, prior to 1984, is not subject to federal income taxes (within certain limitations) until it is distributed to policyholders, at which time it is taxed at regular corporate rates. For federal income tax purposes this untaxed income is accumulated in a memorandum account designated "policyholders' surplus." At December 31, 1998, the accumulated untaxed policyholders' surplus for Central is $2,869,768.
The foregoing indicates that a $1,696,688 redundancy in the 1997 reserves emerged in 1998, and that a $8,274,823 deficiency emerged in 1997. The deficiency in the 1996 reserves resulted from substantial losses developing on insurance plans issued in 1995, and higher utilization than anticipated.
Effective August 1, 1998, Central entered into a reinsurance treaty with United Benefit Life Insurance Company ("UBL"), a life and accident and health insurer in Texas. Under the terms of the treaty, Central agreed to assume 100% of UBL's book of business, until such time as profits earned by Central on the assumed block reach a contractual threshold, which approximates $20,000,000 of pretax income. Upon achieving this threshold, the quota share percentage is reduced from 100% to 80%, until a second threshold, which approximates $16,000,000 in pretax income, is achieved. Upon achieving the second threshold, the quota share percentage is further reduced from 80% to 50%. Central paid to UBL a $20,000,000 ceding allowance in connection with this transaction. In addition, Central entered into an agency arrangement with respect to the marketing of UBL policies with Insurance Advisors of America, Inc. ("IAA"), a subsidiary of United Benefit Managed Care Corporation and an affiliate of UBL, in exchange for a $7,000,000 note receivable. Central recorded a full valuation allowance against such note receivable at December 31, 1998.
The following table summarizes the net impact of reinsurance arrangements on benefits, claims, losses and settlement expenses, commissions, and other operating expenses:
The Company executed a mortgage note payable in December 1990 for $9,000,000 bearing interest at 9 1/2% per annum for 10 years. The Company received $8,500,000 of the funds in December 1990 and the remaining $500,000 in December 1991. The mortgage note is collateralized by the home office building and by an assignment of the tenant lease for the building. The Company has been required to make monthly payments, since January 1991, based on a 30 year amortization schedule, of $75,677 for 10 years. After five years, the Company has the right to prepay the loan with a 3% prepayment fee. Principal payments due in the next three years, assuming no prepayments, are $126,572 in 1999, $139,134 in 2000, and $8,018,178 on January 1, 2001.
In 1998, the Company recognized $866,000 in compensation expense related to stock-based compensation.
Based on the methodology and assumptions delineated above, the weighted average fair value of options granted in 1998, at grant date, was $3.23 per share. The pro forma impact would be to increase the net loss by $785,540 and increase the net loss per share by $0.10 for the year ended December 31, 1998.
The Company has authorized 2,000,000, $.001 par value Non-Voting Preferred Shares. The Company has never issued any Non-Voting Preferred Shares, however, the Board of Directors is authorized at any time to provide for the issuance of, such shares in one or more series, and to determine the designations, preferences, limitations and other rights of the shares issued, including but not limited to the dividend rate,
liquidation preference, redemption rights and price, sinking fund requirements, conversion rights and restrictions on the issuance of such shares. Holders of Non-Voting Preferred Shares shall have no voting rights except as required by law.
The Company's insurance subsidiaries, Central and PALHIC, are required to file Annual Statements with state insurance regulatory authorities to whose jurisdiction those entities are subject. These Annual Statements are prepared on an accounting basis prescribed or permitted by the domiciliary state insurance department, which differs from GAAP. Prescribed accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations and general and administrative rules. Permitted statutory accounting practices encompass all accounting practices not prescribed.
Prior to January 1, 1998, the Plan operated as a noncontributory pension plan, covering substantially all employees who had competed six months of service. Vesting in accordance with the Plan began after two years of service, with full vesting after seven years. Total contributions made under the Plan were $1,308,000 in 1997 and $1,214,000 in 1996.
Fair values of financial instruments are based upon quoted market prices, where available, or on values obtained from independent pricing services. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Although fair value estimates are calculated using assumptions that management believes are appropriate, changes in assumptions could cause these estimates to vary materially. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in the immediate settlement of the instruments.
ANNUITY CONTRACTS -- The fair value for the annuity reserves included in the liability for future policy benefit, losses and claims is the amount payable on demand.
Carrying amounts and estimated fair values of financial instruments at December 31 are summarized as follows:
CERES GROUP, INC. (PARENT ONLY) BALANCE SHEETS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------