In 1996 and 1997, Central Reserve, our then-principal subsidiary, experienced substantial losses incurred in connection with newly-issued group health insurance policies, greater than anticipated utilization, new state and federal mandates and reductions in profitability arising out of industry-wide pricing competition. In June 1997, in order to address the continued decline in Central Reserve's surplus, we borrowed $5.2 million from Huntington National Bank, $5.0 million of which was contributed to the surplus of Central Reserve.
Fee and other income for 1998 was $7.7 million, compared to $9.2 million for 1997, a decrease of 15.9%. Fee and other income in 1998 consisted of fees for Central Reserve servicing the United Benefit Life premiums assumed and administrative and association fees. The decrease was the result of the cession to Hannover. The amortization of deferred reinsurance gain represented Central Reserve's portion of the $20.0 million ceding commission paid by Hannover for the United Benefit Life block of group health policies in August 1998.
Interest expense and financing costs increased to $1.8 million, or 70.8%, from $1.1 million in 1997. The increase was due primarily to the increase in interest from the $20 million bridge loan incurred in December 1997. The bridge loan was paid in full in July 1998 from the $40.2 million equity transaction.
The net loss for 1998 was $3.8 million, or $0.49 per share, compared to a net loss of $21.0 million, or $5.01 per share, for 1997. Although benefits, claims, losses, and settlement expenses were reduced as a result of the reinsurance agreements, Central Reserve implemented certain policy benefit and managed care changes along with premium rate increases, which also contributed to the reduced loss ratio.
other which consists of primarily interest income and interest expense. The following tables present the revenues, expenses and profit (loss), before federal income taxes, on a GAAP basis for the last three years attributable to our industry segments for Central Reserve through 1998 and for all of our subsidiaries in 1999, with the exception of 11 months for Continental General. We do not separately allocate investment assets or other identifiable assets by industry segment, nor are income tax (benefit) expenses allocated by industry segment.
Many factors could cause our actual results to differ materially and adversely from those in the forward-looking statements, including the following:
- our ability to develop, distribute and administer competitive products and services in a timely, cost-effective manner;
A portion of the purchase price paid by the Company for Continental General was allocated to the value of business acquired based on the actuarially-determined present value of the expected pre-tax future profits from the business assuming a discount rate of 15%. Interest is accrued on the balance annually at a rate consistent with the rate credited on the acquired policies on the acquisition date, which ranges from 4.75% to 8.75%. Recoverability of the value of business acquired is evaluated periodically by comparing the current estimate of the present value of expected pre-tax future profits to the unamoritized asset balance. If such current estimate is less than the existing asset balance, the difference would be charged to expense.
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 interest sensitive contracts, principally Universal Life and 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.
The fair value of assets acquired totaled $6.5 million, consisting principally of bonds and cash, and liabilities of $1.0 million, which relate principally to premiums taxes payable.
On March 18, 1999, Central announced the execution of an agreement with United Benefit Managed Care Corporation, to purchase all of the outstanding shares of its subsidiary, United Benefit. On June 14, 1999, Central terminated this agreement due to a reserve shortfall at United Benefit in excess of amounts projected. Pursuant to the "true up" provision in the agreements between United Benefit, IAA and Central, the reserve shortfall calculated at December 31, 1999, totaled $19.4 million. On July 21, 1999, following receipt of approval from the Department of Insurance of the State of Indiana, Central foreclosed on the stock of United Benefit and the renewal commissions due IAA in partial payment of the $19.4 million reserve shortfall.
In 1999 and 1998, total matching contributions expensed by the Company were approximately $133,000 and $52,000, respectively.
Prior to January 1, 1998, the Plan operated as a noncontributory pension plan, covering substantially all employees of Central who had completed 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 $1.3 million in 1997.
$15 million from financing provided by The Chase Manhattan Bank and associated banks, (b) $25.0 million from special dividends to be paid by Pyramid in conjunction with the purchase, (c) $7.5 million from the sale of our convertible preferred stock to the seller, and (d) $20.0 million from the proceeds of a private placement offering of our common stock at $6.00 per share.