In June 2005, we introduced new Medicare supplement products through our Provident American Life subsidiary and began selling new senior life insurance plans. We also developed a career distribution channel to focus on marketing senior products of our Provident American Life and Continental General subsidiaries. These agents give us a right of first refusal on all senior products. At December 31, 2005, we had appointed 23 regional sales managers and approximately 256 agents to focus specifically on marketing our senior product portfolio.
Income before federal income taxes was $20.4 million for 2005, compared to $21.9 million for the same period in 2004, including a $3.1 million pre-tax charge related to the settlement of the California lawsuits.
Senior and other premiums increased $10.3 million, or 6.0%, to $183.2 million for the year ended December 31, 2004, compared to $172.9 million for 2003. The increase in senior and other premiums was primarily the result of an increase in new business production of our Medicare supplement policies and growth of our senior life product. New business production of Medicare supplement policies increased in 2004 compared to 2003 due primarily to the introduction of new standardized Medicare supplement plans at Central Reserve and a new standardized plan at Continental General.
If our non-regulated subsidiaries do not generate sufficient fee income or we are unable to take dividends from our insurance subsidiaries to service all of our debt obligations, there may be a material adverse effect on our business, financial condition and results of operations, and a significant adverse effect on the market value of our common stock. In addition, if needed, additional financing may not be available on terms favorable to us or at all.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on criteria established in “Internal Control - Integrated Framework‘ issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
Cash and cash equivalents include cash and all liquid securities with maturities of 90 days or less when purchased. See Note B. Cash and Investments for further information.
In September 2005, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, issued by the FASB. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement or rider to a contract, or by the election of a feature or coverage within a contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged. Retrospective application of SOP 05-1 to previously issued financial statements is not permitted. Initial application of SOP 05-1 should be as of the beginning of an entity’s fiscal year. We are currently evaluating the impact of SOP 05-1 on our consolidated results of operations, cash flows and financial position.
The amortized cost and estimated fair value of available-for-sale securities as of December 31, 2005 were as follows:
during the commitment period to fund working capital needs or to purchase new investments. Once the commitment period expires, we are under no obligation to fund the remaining unfunded commitment, but may elect to do so. The partnership has not made any capital calls on our $10.0 million commitment. Therefore, at December 31, 2005, we had outstanding unfunded and callable capital commitments totaling $10.0 million related to this limited partnership.
On March 31, 2003, Continental General sold the stock of its subsidiary, Pyramid Life, which was primarily included in our Senior and Other segment, to the Pennsylvania Life Insurance Company, a subsidiary of Universal American Financial Corp., for approximately $57.5 million in cash, before transaction costs of $2.2 million. Net proceeds from the sale were used to strengthen Continental General’s statutory capital and repay $10.0 million of our bank debt. The total loss from the sale (net of taxes and expenses incurred) was $13.8 million. Additionally, we continued to process Pyramid Life’s business through an administrative services agreement, which terminated on December 31, 2003. At December 31, 2002, we adjusted the carrying value of Pyramid Life’s assets held for sale to fair market value to reflect the purchase price of $57.5 million (before transaction costs of $2.2 million), which resulted in a charge of $11.6 million in 2002. In addition, Pyramid Life’s book value increased in the first quarter of 2003 due to net income and unrealized investment gains. Pursuant to the stock purchase agreement, the final purchase price was adjusted based on the statutory book value at March 31, 2003, and an additional loss of $2.2 million was recorded in 2003 to reflect the final purchase price. As a result of the sale, Pyramid Life’s operations were classified as discontinued operations for 2003.
We have revised the 2003 Consolidated Statement of Cash Flows to separately disclose the operating, investing and financing portions of the cash flows attributable to discontinued operations, which in prior years were reported on a combined basis as a single amount.
Our obligations under the credit agreement, as amended, are guaranteed by four of our non-regulated subsidiaries and are secured by pledges of the capital stock of Central Reserve, Continental General, and our non-regulated subsidiaries, as well as security interests in certain equipment and other tangible property of Ceres and the non-regulated subsidiaries.
In 1998 and 1999, pursuant to various individual employment agreements, we granted non-qualified options to purchase 815,000 shares of our common stock to certain key employees. Such grants generally vest over three years and expire ten years from the date of grant. At December 31, 2005, there were options outstanding pursuant to these grants to purchase 315,000 shares.
Our 2000 Employee Stock Purchase Plan was adopted by our stockholders on June 27, 2000. Under the plan, employees may purchase shares of our common stock at a 15% discount from fair value. All of our full time employees, including officers, are eligible to participate in the employee stock purchase plan, subject to limited exceptions. Eligible employees participate voluntarily, and may withdraw from an offering at any time before the stock is purchased. Participation terminates automatically upon termination of employment other than for death, disability or retirement. Six-month offerings are made available beginning May 1 and November 1 of each year. The purchase price per share in an offering will not be less than 85% of the lesser of the stock’s fair value at the beginning of the offering period or on the applicable exercise date and may be paid through payroll deductions. In 2005 and 2004, 13,343 and 9,027 shares, respectively, had been issued under the employee plan.
Pursuant to the 1998 Key Employee Share Incentive Plan, as amended on May 19, 2004, 55,000 shares of restricted stock awards were granted to executive officers in 2004. The awards vest 25% over four years. We recognized stock compensation expense related to these awards of $0.1 million in each of the years ended December 31, 2005 and 2004. In addition, 41,850 and 27,996 shares of our common stock were granted to non-employee directors of our Board in 2005 and 2004, respectively. We recognized stock compensation expense related to these awards of $0.2 million in 2005, which was comparable to the stock compensation expense recognized in 2004.
We have authorized 1,900,000 Non-Voting Preferred Shares, $.001 par value. We have never issued any Non-Voting Preferred Shares. However, our Board 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. However, our credit agreement prohibits the payment of dividends on preferred stock. Holders of non-voting preferred shares shall have no voting rights except as required by law.