-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OJ219AuEFI7S4oOpHwhhv23vbS52F/T1mLKRr+7bVG9e1H4zZrJRlTlAQF+ldOMC fkMFzE7AKcVLxQ6NiKrYDg== /in/edgar/work/0000950152-00-007183/0000950152-00-007183.txt : 20001011 0000950152-00-007183.hdr.sgml : 20001011 ACCESSION NUMBER: 0000950152-00-007183 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000725 ITEM INFORMATION: FILED AS OF DATE: 20001010 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CERES GROUP INC CENTRAL INDEX KEY: 0000215403 STANDARD INDUSTRIAL CLASSIFICATION: [6311 ] IRS NUMBER: 341017531 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-08483 FILM NUMBER: 736524 BUSINESS ADDRESS: STREET 1: 17800 ROYALTON RD CITY: STRONGSVILLE STATE: OH ZIP: 44136 BUSINESS PHONE: 2165722400 MAIL ADDRESS: STREET 1: 17800 ROYALTON RD CITY: STRONGSVILLE STATE: OH ZIP: 44136 FORMER COMPANY: FORMER CONFORMED NAME: CENTRAL RESERVE LIFE CORP DATE OF NAME CHANGE: 19920703 8-K/A 1 l84240ae8-ka.txt CERES GROUP, INC. FORM 8-K/A 1 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 8-K/A Current Report (Amendment No. 1) Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: July 25, 2000 (Date of earliest event reported) Ceres Group, Inc. (Exact Name or Registrant as specified in its charter)
Delaware 0-8483 34-1017531 -------- ------ ---------- (State or other jurisdiction of (Commission File Number) (IRS Employer Identification Incorporation) Number)
17800 Royalton Road, Cleveland, Ohio 44136 ------------------------------------------ (Address of Principle Executive Offices) (Zip Code) (440) 572-2400 -------------- (Registrant's telephone number, including area code) 2 ITEM 7. FINANCIAL STATEMENT, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS. On August 9, 2000, Ceres Group, Inc. filed a Form 8-K that reported the acquisition, through Ceres' wholly-owned subsidiary, Continental General Insurance Company, of The Pyramid Life Insurance Company from United Insurance Company of America, a subsidiary of Unitrin, Inc. of Chicago, for $67.5 million. In Item 7 of the 8-K, Ceres stated that the audited financial statements of Pyramid and pro forma financial information of Ceres showing the effect of the acquisition would be filed within 60 days of the filing of the Form 8-K. This Form 8-K/A is filed for the purpose of filing such financial statements. (a) FINANCIAL STATEMENTS OF THE BUSINESS ACQUIRED Audited financial statements of Pyramid for the year ended December 31, 1999 and unaudited financial statements of Pyramid for the six months ended June 30, 2000. (b) PRO FORMA FINANCIAL INFORMATION Unaudited pro forma balance sheet of Ceres as of June 30, 2000 and unaudited pro forma statement of operations for the six months ended June 30, 2000 and the year ended December 31, 1999 giving effect to the pro forma adjustments related to the acquisition of Pyramid. (c) EXHIBIT 23 Consent of KPMG LLP 3 INDEPENDENT AUDITOR'S REPORT The Board of Directors The Pyramid Life Insurance Company We have audited the accompanying balance sheet of The Pyramid Life Insurance Company as of December 31, 1999 and the related statements of income, cash flows and stockholder's equity and comprehensive income for the year ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Pyramid Life Insurance Company as of December 31, 1999 and the results of its operations and its cash flow for the year ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP March 31, 2000 Chicago, Illinois 4 THE PYRAMID LIFE INSURANCE COMPANY BALANCE SHEETS (dollars in thousands, except for share data)
(UNAUDITED) JUNE 30, DECEMBER 31, 2000 1999 -------- -------- ASSETS Investments: Fixed Maturity Securities, at Fair Value (Amortized Cost: 1999 - $101,435) $ 78,936 $ 98,070 Loans to Policyholders 2,397 2,420 -------- -------- Total Investments 81,333 100,490 Cash 31,035 9,142 Receivables 5,585 6,480 Deferred Policy Acquisition Costs 6,144 5,837 Deferred Income Taxes 7,387 7,146 Goodwill 7,044 7,044 Other Assets 2,422 2,746 -------- -------- Total Assets $140,950 $138,885 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Insurance Reserves: Life $ 20,989 $ 21,197 Accident and Health 7,751 6,898 Claims 10,772 10,944 -------- -------- Total Insurance Reserves 39,512 39,039 Policyholders' Contract Deposits 30,168 30,342 Unearned Premium Reserves 9,011 7,790 Accrued Income Taxes 154 41 Accrued Expenses and Other Liabilities 2,224 3,078 -------- -------- Total Liabilities 81,069 80,290 -------- -------- Stockholder's Equity: Common Stock, $4,300 Par Value, 582 and 350 Shares Authorized, Issued and Outstanding at December 31, 1999 2,503 2,503 Paid-in Capital 436 436 Retained Earnings 59,346 57,840 Accumulated Other Comprehensive Loss (2,404) (2,184) -------- -------- Total Stockholder's Equity 59,881 58,595 -------- -------- Total Liabilities and Stockholder's Equity $140,950 $138,885 ======== ========
See accompanying notes to the financial statements. 5 THE PYRAMID LIFE INSURANCE COMPANY STATEMENTS OF INCOME (dollars in thousands)
(UNAUDITED) SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 2000 1999 ------- ------- REVENUES Premiums $31,591 $59,767 Net Investment Income 3,844 7,178 Other 1,533 3,810 ------- ------- Total Revenues 36,968 70,755 ------- ------- EXPENSES Policyholder Benefits 24,166 44,794 Amortization of Deferred Policy Acquisition Costs 719 1,566 Other Insurance Expenses 9,755 18,725 ------- ------- Total Expenses 34,640 65,085 ------- ------- Income Before Income Taxes 2,328 5,670 Income Tax Expense 822 1,991 ------- ------- NET INCOME $ 1,506 $ 3,679 ======= =======
See accompanying notes to the financial statements. 6 THE PYRAMID LIFE INSURANCE COMPANY STATEMENTS OF CASH FLOWS (dollars in thousands)
(UNAUDITED) SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 2000 1999 -------- ------- OPERATING ACTIVITIES Net Income $ 1,506 $ 3,679 Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operations: Deferred Income Tax Expense (122) (641) Amortization of Investments 243 664 Depreciation 131 322 Change in: Receivables 895 (1,582) Deferred Policy Acquisition Costs (307) 142 Other Assets (324) (526) Insurance Reserves 114 (2,253) Accrued Income Taxes 113 (413) Unearned Premiums 1,221 6 Accrued Expenses and Other Liabilities (854) (201) -------- ------- Net Cash Provided (Used) by Operating Activities 2,616 (803) -------- ------- INVESTING ACTIVITIES Sales and Maturities of Fixed Maturity Securities 18,562 28,216 Purchases of Fixed Maturity Securities -- (26,101) Purchases of Property & Equipment (183) (100) Net Change in Loans to Policyholders 23 65 -------- ------- Net Cash Provided by Investing Activities 18,402 2,080 -------- ------- FINANCING ACTIVITIES Universal Life and Annuity Receipts from Policyholders 1,891 4,186 Universal Life and Annuity Payments to Policyholders (1,016) (1,589) -------- ------- Net Cash Provided by Financing Activities 875 2,597 -------- ------- Increase in Cash 21,893 3,874 Cash, Beginning of the Period 9,142 5,268 -------- ------- Cash, End of the Period $ 31,035 $ 9,142 ======== ======= Supplemental Disclosure of Cash Flow Information Federal Income Taxes Paid $ 833 $ 3,047
See accompanying notes to the financial statements. 7 THE PYRAMID LIFE INSURANCE COMPANY STATEMENTS OF STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME (dollars in thousands)
ACCUMULATED OTHER TOTAL PAID - IN RETAINED COMPREHENSIVE SHAREHOLDER'S COMMON STOCK CAPITAL EARNINGS INCOME (LOSS) EQUITY) ------------ --------- --------- ------------- ------------- BALANCE, DECEMBER 31, 1998 $1,505 $436 $55,159 $ 1,398 $58,498 Net Income -- -- 3,679 -- 3,679 Other Comprehensive Loss (Note 3) -- -- -- (3,582) (3,582) ------- Total Comprehensive Income 97 Common Stock Dividend (Note 4) 998 -- (998) -- -- ------ ---- ------- ------- ------- BALANCE, DECEMBER 31, 1999 2,503 436 57,840 (2,184) 58,595 Net Income 1,506 1,506 Other Comprehensive Loss (Note 3) (220) (220) ------- Total Comprehensive Income 1,286 ------ ---- ------- ------- ------- BALANCE, JUNE 30, 2000 (Unaudited) $2,503 $436 $59,346 $(2,404) $59,881 ====== ==== ======= ======= =======
See accompanying notes to the financial statements. 8 THE PYRAMID LIFE INSURANCE COMPANY NOTES TO THE FINANCIAL STATEMENTS Year Ended December 31, 1999 and Six Months Ended June 30, 2000 (Unaudited) NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The Pyramid Life Insurance Company ("Pyramid" or the "Company"), a life and health insurance company domiciled in Kansas, is a wholly-owned subsidiary of United Insurance Company of America ("UICA"), which in turn is wholly-owned by Unitrin, Inc. ("Unitrin"). The Company provides individual health and life insurance products marketed through its independent agents and agencies. The audited Financial Statements as of and for the year ended December 31, 1999 included herein have been prepared on the basis of generally accepted accounting principles. The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. The accompanying unaudited Financial Statements as of and for the six months ended June 30, 2000 have been prepared by Pyramid in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission and reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim period. All adjustments made were normal recurring accruals. SIGNIFICANT ACCOUNTING POLICIES INVESTMENTS Investments in Fixed Maturity Securities include bonds, notes and redemptive preferred stocks at fair value and are classified as available-for-sale. Unrealized appreciation or depreciation, net of applicable deferred income taxes, on Fixed Maturity Securities is included in Stockholder's Equity and classified as Accumulated Other Comprehensive Income (Loss). The Company has no investments in derivative financial instruments. Gains and losses on sales of investments are computed on the specific identification method and are included in Net Income. The estimated fair value of investments is based upon quoted market price, where available, or on values obtained from independent pricing services. DEFERRED POLICY ACQUISITION COSTS Certain costs directly associated with the acquiring of new business, principally commissions, are deferred. Costs deferred on traditional life products are amortized over the anticipated premium-paying period of related policies in proportion to the ratio of the annual premiums to the total premiums anticipated, which is estimated using the same assumptions in calculating policy reserves. Costs of acquiring accident and health policies are amortized over the term of the related policy. Costs of acquiring universal life products are amortized in proportion to the present value of estimated gross profits over the product's assumed duration. To the extent that unrealized gains or losses on available-for-sale securities would result in an adjustment of deferred policy acquisition costs had those gains or losses actually been realized, the related unamortized deferred policy acquisition costs are recorded as an adjustment of the unrealized gains or losses included in stockholder's equity. 9 THE PYRAMID LIFE INSURANCE COMPANY NOTES TO THE FINANCIAL STATEMENTS Year Ended December 31, 1999 and Six Months Ended June 30, 2000 (Unaudited) NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INSURANCE RESERVES Reserves for claim and claim adjustment expenses on accident and health claims represent the estimated amounts necessary to cover the ultimate costs of investigating and settling all losses incurred. Such estimates are based upon individual case estimates for reported claims and estimates for incurred but not reported losses. For traditional life insurance products, the reserve for future policy benefits are primarily estimated on the net level premium method based on expected mortality, interest and withdrawal rates, including provisions for adverse mortality. These assumptions vary by such characteristics as plan, age at issue and policy duration. Mortality assumptions reflect the Company's historical and industry standards. Interest rate assumptions principally range from 3.00% to 6.00%. Withdrawal assumptions are based on actual and industry experience. Reserves for universal life contracts are equal to the account balances that accrue to the policyholders. Interest crediting rates ranged from 5.75% to 6.00% for the periods ended December 31, 1999 and June 30, 2000. REVENUE Accident and health insurance premiums are recognized ratably over the periods to which the premiums relate. Traditional life insurance premiums are recognized as revenue when due. Revenues on universal life contracts are comprised of contract charges and fees, which are recognized over the coverage period. REINSURANCE In the normal course of business, the Company reinsures certain risks above certain retention levels with other insurance enterprises. Amounts recoverable from reinsurers for benefits for which the Company has not been relieved of its legal obligation to the policyholder are included in Receivables. Gains related to long-duration reinsurance contracts are deferred and amortized over the life of the underlying reinsured policies. Losses related to long-duration reinsurance contracts are recognized immediately. GOODWILL Goodwill relating to the acquisition of the Company by UICA prior to 1970 is not being amortized. UICA has elected to pushdown the costs in excess of net assets of purchased business to the Company. 10 THE PYRAMID LIFE INSURANCE COMPANY NOTES TO THE FINANCIAL STATEMENTS Year Ended December 31, 1999 and Six Months Ended June 30, 2000 (Unaudited) NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period in which the change is enacted. RELATED PARTY TRANSACTIONS The Company and Unitrin Services Company ("USC"), a wholly-owned subsidiary of Unitrin, are parties to a general services agreement whereby USC provides certain management services, group medical insurance and other insurance to the Company. Amounts allocated to the Company were $1,317,000 in 1999 and $559,000 for the six months ended June 30, 2000. Additionally, the Company and USC are parties to a data processing agreement whereby USC provides certain data processing services to the Company. Amounts allocated to the Company were $645,000 in 1999, and $284,000 for the six months ended June 30, 2000. The Company and UICA are parties to certain agreements whereby the Company provides claims administration, accounting and payroll services to UICA's Worksite Products Division. Other Income includes $779,000 of service fees related to the agreement with UICA in 1999, and $160,000 for the six months ended June 30, 2000. NEW ACCOUNTING PRONOUNCEMENTS In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133" which deferred the effective date of SFAS No. 133, "Accounting for Derivatives Instruments and for Hedging Activities." SFAS No. 133 requires all derivatives to be recorded on the balance sheet at fair value and establishes "special accounting" for the following three different types of hedges: hedges of changes in the fair value of assets, liabilities or firm commitments; hedges of the variable cash flows of forecasted transactions; and hedges of foreign currency exposures of net investments in foreign operations. Accordingly, SFAS No. 133 is effective for years beginning after June 15, 2000, with earlier adoption permitted. The Company believes that the effect of adoption of SFAS No. 133 will not be material. 11 THE PYRAMID LIFE INSURANCE COMPANY NOTES TO THE FINANCIAL STATEMENTS Year Ended December 31, 1999 and Six Months Ended June 30, 2000 (Unaudited) NOTE 2. INVESTMENTS AND INVESTMENT INCOME The amortized cost and estimated fair value of the Company's investments in Fixed Maturity Securities at December 31, 1999 were:
GROSS UNREALIZED AMORTIZED -------------------- FAIR COST GAINS LOSSES VALUE -------- ----- ------- ------- (dollars in thousands) U.S. Government and Government Agencies and Authorities $ 88,088 $202 $(2,029) $86,261 Corporate Bonds and Notes 11,597 -- (1,190) 10,407 Redemptive Preferred Stock 1,750 -- (348) 1,402 -------- ---- ------- ------- Total $101,435 $202 $(3,567) $98,070 ======== ==== ======= =======
Net Investment Income for the year ended December 31, 1999 was: 1999 ------ (dollars in thousands) Interest and Dividends on Fixed Maturity Securities $6,573 Other 624 ------ Total 7,197 Investment Expenses 19 ------ Net Investment Income $7,178 ====== 12 THE PYRAMID LIFE INSURANCE COMPANY NOTES TO THE FINANCIAL STATEMENTS Year Ended December 31, 1999 and Six Months Ended June 30, 2000 (Unaudited) NOTE 2. INVESTMENTS AND INVESTMENT INCOME (CONTINUED) The components of sales and maturities of fixed maturity securities for the year ended December 31, 1999 were: 1999 ------- (dollars in thousands) Proceeds from Sales and Maturities $28,216 ======= Gross Realized Gains 1 Gross Realized Losses (2) ------- Net Realized Gains (Losses) $ (1) ======= The amortized cost and estimated fair value of the Company's investments in Fixed Maturity Securities at December 31, 1999 by contractual maturity were: AMORTIZED COST FAIR VALUE -------------- ---------- (dollars in thousands) Due in One Year or Less $ 35,325 $35,478 Due After One Year to Five Years 22,890 22,610 Due After Five Years to Fifteen Years 29,582 27,940 Due After Fifteen Years 11,887 10,640 Redemptive Preferred Stock with no single maturity date 1,751 1,402 -------- ------- Total Fixed Maturity Securities $101,435 $98,070 ======== ======= The expected maturities may differ from the contractual maturities because debtors may have the right to call or prepay obligations with or without call or prepayment penalties. 13 THE PYRAMID LIFE INSURANCE COMPANY NOTES TO THE FINANCIAL STATEMENTS Year Ended December 31, 1999 and Six Months Ended June 30, 2000 (Unaudited) NOTE 3. OTHER COMPREHENSIVE LOSS Comprehensive income is comprised of all changes to stockholder's equity, including net income, except those changes resulting from investments by and distributions to stockholders. The changes in the components of accumulated other comprehensive loss are shown below:
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 2000 1999 ----- ------- (dollars in thousands) Gross Unrealized Investment Gains (Losses) Arising During the Period: Fixed Maturity Securities $(339) $(5,518) Income Tax Benefit (Expense) 119 1,936 ----- ------- Unrealized Investment Losses, Net (220) (3,582) Reclassification Adjustment for Gross Gains Realized in Net Income -- -- ----- ------- Other Comprehensive Loss $(220) $(3,582) ===== =======
NOTE 4. STATUTORY FINANCIAL INFORMATION The Company is domiciled in the State of Kansas and prepares statutory financial statements on the basis of accounting practices prescribed by the Department of Insurance of the State of Kansas, which is a comprehensive basis of accounting other than Generally Accepted Accounting Principles. Statutory capital and surplus and net income, determined in accordance with accounting practices prescribed by regulation and statute of the Department of Insurance of the State of Kansas were: 1999 ----- (dollars in thousands) Statutory Capital and Surplus $43,334 Statutory Net Income $ 2,951 14 THE PYRAMID LIFE INSURANCE COMPANY NOTES TO THE FINANCIAL STATEMENTS Year Ended December 31, 1999 and Six Months Ended June 30, 2000 (Unaudited) NOTE 4. STATUTORY FINANCIAL INFORMATION (CONTINUED) Various state insurance laws restrict the amount that insurance companies may transfer in the form of dividends, loans, or advances without prior approval of regulatory authorities. In 2000, the Company would be able to pay $4,333,000 to its shareholder without prior written approval of regulatory authorities. The statutory statement value of bonds on deposit with various insurance regulatory agencies, as required by laws, was $31,380,000 at December 31, 1999. In 1999 the Company issued an additional 232 shares of stock in the form of a stock dividend to its stockholders. NOTE 5. ACCIDENT AND HEALTH INSURANCE CLAIM RESERVE ACTIVITY Accident and Health Claim Reserve Activity for the year ended December 31, 1999 and the six months ended June 30, 2000 was:
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 2000 1999 ---------- ------------ (dollars in thousands) Reserves Beginning of the Period Gross $ 10,652 $ 11,204 Ceded 577 267 -------- -------- Net Reserves Beginning of the Period 10,075 10,937 -------- -------- Incurred related to: Current Year 22,241 39,976 Prior Years (1,095) (961) -------- -------- Total Incurred 21,146 39,015 -------- -------- Paid related to: Current Year 14,441 30,692 Prior Years 6,676 9,185 -------- -------- Total Paid 21,117 39,877 -------- -------- Net Reserves at the End of the Period 10,104 10,075 Ceded 554 577 -------- -------- Reserves at the End of the Period $ 10,658 $ 10,652 ======== ========
15 THE PYRAMID LIFE INSURANCE COMPANY NOTES TO THE FINANCIAL STATEMENTS Year Ended December 31, 1999 and Six Months Ended June 30, 2000 (Unaudited) NOTE 5. ACCIDENT AND HEALTH INSURANCE CLAIM RESERVE ACTIVITY (CONTINUED) The following is a reconciliation of the Accident and Health Claim Reserve balances to the amounts reported in the Balance Sheets at December 31, 1999 and at June 30, 2000:
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 2000 1999 -------- -------- (dollars in thousands) Reserves as Reported: Accident and Health Future Policy Benefits $ 7,751 $ 6,898 Claims 10,772 10,944 -------- -------- Total Reserves as Reported 18,523 17,842 Less Active Life Reserve (6,597) (5,963) Less Life Claims (1,268) (1,227) -------- -------- Accident and Health Claim Reserves $ 10,658 $ 10,652 ======== ========
NOTE 6. REINSURANCE The Company utilizes reinsurance arrangements to limit its maximum loss, provide greater diversification of risk, and minimize exposure on larger risks. The ceding of insurance does not discharge the primary liability of the original insurer, and accordingly the original insurer remains contingently liable. Amounts recoverable from reinsurers are estimated in a manner consistent with the reserve for losses liability. The effects of reinsurance on written premiums are as follows:
DIRECT ASSUMED CEDED NET ------- ------- ------ ------- (dollars in thousands) Year Ended December 31, 1999 Accident and Health $58,639 $-- $1,349 $57,290 Life 6,678 -- 524 6,154 ------- --- ------ ------- Total Written Premiums $65,317 $-- $1,873 $63,444 ======= === ====== ======= Six Months Ended June 30, 2000 Accident and Health $31,718 $-- $ 893 $30,825 Life 3,237 -- 267 2,970 ------- --- ------ ------- Total Written Premiums $34,955 $-- $1,160 $33,795 ======= === ====== =======
16 THE PYRAMID LIFE INSURANCE COMPANY NOTES TO THE FINANCIAL STATEMENTS Year Ended December 31, 1999 and Six Months Ended June 30, 2000 (Unaudited) NOTE 7. FEDERAL INCOME TAXES The Company is subject to Federal income taxation as a life insurance company. For the year ended December 31, 1999, Unitrin will file a consolidated Federal income tax return with all of its subsidiaries including the Company, except for The Reliable Life Insurance Company and its subsidiaries ("Reliable") and NationalCare Insurance Company and its subsidiaries ("NationalCare"). The method of tax allocation between companies is subject to a written agreement. In accordance with this agreement, the Company pays Federal income tax on a separate company basis. Prior to 1984, certain life insurance company income was not subject to current taxation. This accumulated amount of income was set aside in a special memorandum tax account. Federal income taxes would be paid on the amount of such income, approximately $10,811,000 if distributions to stockholders in the future exceeded previously taxed income or if the Company does not continue to meet certain limitations. Federal income tax expense is composed of the following for the year ended December 31, 1999:
1999 ---------------------- (dollars in thousands) Current 2,633 Deferred (642) ------ Total 1,991 ======
The components of the effective income tax rate on Income before Income Taxes for the year ended December 31, 1999 were:
1999 ------ Statutory Federal Income Tax Rate 35.0 % Meals and Entertainment 0.2 ------ Effective Income Tax Rate 35.2 % ======
17 THE PYRAMID LIFE INSURANCE COMPANY NOTES TO THE FINANCIAL STATEMENTS Year Ended December 31, 1999 and Six Months Ended June 30, 2000 (Unaudited) NOTE 7. FEDERAL INCOME TAXES (CONTINUED) The effects of temporary differences that give rise to significant portions of the Company's Net Deferred Tax Asset at December 31, 1999 were:
1999 ---------------------- (dollars in thousands) Deferred Tax Assets: Insurance Reserves $4,155 Deferred Policy Acquisition Costs 3,196 Unrealized Investment Losses 1,175 ------ Total Deferred Tax Assets 8,526 ------ Deferred Tax Liabilities: Deferred and Uncollected Premium 736 Other 644 ------ Total Deferred Tax Liabilities 1,380 ------ Net Deferred Tax Asset $7,146 ======
Management believes that the Company will generate sufficient future taxable income to realize the net deferred tax asset. Accordingly, the Company has not recorded a valuation allowance. NOTE 8. RETIREMENT PLANS Unitrin sponsors a defined benefit pension plan covering substantially all of the Company's employees. Benefits are based on the employee's years of service and compensation during employment. Unitrin's annual contributions are made at an amount necessary to meet the funding requirements of the Employee Retirement Income Security Act of 1974, as amended. Pension expense of $181,000 was recognized by the Company in accordance with SFAS No. 87, "Employer's Accounting for Pensions" in 1999. The accumulated benefit obligation of the Unitrin pension plan determined in accordance with SFAS No. 87 based on an assumed interest rate of 7.25 percent and a rate of increase in future compensation levels of 4.0 percent and long-term rate on the plan assets of 6.5% was $103,420,000 including vested benefits of $101,326,000 at December 31, 1999. The fair value of plan assets was $168,785,000 at December 31, 1999. NOTE 9. CONTINGENCIES The Company is party to various legal actions incidental to their businesses. The Company believes that resolution of these matters will not have a material adverse effect on the Company's financial position. NOTE 10. SUBSEQUENT EVENTS (UNAUDITED) On July 26, 2000, UICA, the Company's parent, completed the sale of the Company to Ceres Group, Inc. for $67,500,000 in cash, subject to an adjustment for a dividend paid by the Company to UICA of $25,000,000 immediately prior to closing. 18 THE PYRAMID LIFE INSURANCE COMPANY NOTES TO THE FINANCIAL STATEMENTS Year Ended December 31, 1999 and Six Months Ended June 30, 2000 (Unaudited) NOTE 11. BUSINESS SEGMENTS The Company is engaged in the Individual Life and Health insurance business providing Traditional Life coverages as well as Accident and Health coverages, principally Major Medical Insurance and Medicare Supplement Insurance. The accounting policies of the segments are the same as those described in Note 1. The Company manages its assets on a legal entity basis, as such assets are not readily identifiable by individual segment; distinct investment portfolios are not maintained for each segment, and accordingly, allocation of assets to each segment is not performed. Therefore, investment income and realized investment gains/losses are allocated based on each segment's carried insurance reserves, as adjusted. The Operating Profit for each business segment is derived after all operating expenses have been allocated, which are primarily allocated based on premium. All significant intercompany income and expenses have been eliminated. Segment Revenues and Operating Profits for the year ended December 31, 1999 and the six months ended June 30, 2000 were:
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, 2000 1999 ---------- ------------ (dollars in thousands) Revenues: Individual Life Insurance $ 5,291 $10,507 Accident and Health Major Medical 4,371 11,098 Medicare Supplement 25,203 44,958 Other 2,103 4,192 ------- ------- Total Revenues $36,968 $70,755 ======= ======= Operating Profits: Individual Life Insurance $ 1,687 $ 1,911 Accident and Health Major Medical 182 1,396 Medicare Supplement 545 1,851 Other (86) 512 ------- ------- Total Operating Profits $ 2,328 $ 5,670 ======= =======
19 UNAUDITED PRO FORMA FINANCIAL STATEMENTS The following unaudited pro forma statements of operations of Ceres Group, Inc. ("Ceres") for six months ended June 30, 2000 and the year ended December 31, 1999 present the results for Ceres as if the acquisition of The Pyramid Life Insurance Company (Pyramid) and the private placement offering and bank financing consummated by Ceres in connection with the acquisition had occurred as of January 1, 2000 and 1999, respectively. The accompanying unaudited pro forma balance sheet as of June 30, 2000 gives effect to the acquisition, private placement offering and bank financing as if they had occurred as of June 30, 2000. The unaudited pro forma financial statements do not purport to represent Ceres' financial position or the operating results that would have been achieved had the acquisition been consummated as of the dates indicated and should not be construed as projecting Ceres' future financial position or operating results. The unaudited pro forma financial statements do not reflect any projected revenue increases or cost savings. The pro forma adjustments are based on available information and certain assumptions that Ceres currently believes are reasonable under the circumstances. The unaudited pro forma financial statements should be read in conjunction with the accompanying notes thereto, the historical financial statements of Ceres and Pyramid as of and for the six months ended June 30, 2000, and for the year ended December 31, 1999. The pro forma adjustments are applied to the historical financial statements to account for, among other things, the acquisition using the purchase method of accounting. Under purchase accounting, the total purchase cost for the acquisition has been allocated to the assets and liabilities of Pyramid based on their fair values. Allocations are subject to valuations as of the date of the acquisition based on appraisals and other studies which are not yet fully completed. Accordingly, the final allocations may be different from the amounts reflected herein. Although the final allocations may differ, the unaudited pro forma financial statement reflect management's best estimates based on currently available information as of the date of this filing. 20 PRO FORMA BALANCE SHEET AS OF JUNE 30, 2000 (UNAUDITED) (dollars in thousands)
HISTORICAL ------------------------------------------- PYRAMID PRO FORMA NOTE CERES GROUP, INC. LIFE ADJUSTMENTS REFERENCE PRO FORMA ----------------------------------------------------------------------- ASSETS Investments: Fixed maturities, available for sale, at fair value $322,352 $ 78,936 $ (65) (2a) $ 401,223 Surplus notes 4,818 0 0 4,818 Policy and mortgage loans 3,764 2,397 0 6,161 ------------------------------------- ---------- Total investments 330,934 81,333 (65) 412,202 Cash and cash equivalents 32,974 31,035 (25,000) (1c) 29,136 (9,873) (1d) Accrued investment income 5,735 2,029 0 7,764 Premiums receivable 6,696 386 0 7,082 Note receivable 0 0 0 0 Reinsurance receivable 254,828 3,170 0 257,998 Property held for sale 0 0 Property and equipment, net 15,094 840 1,225 (2b) 17,159 Deferred federal income taxes 0 7,387 (2,119) (6) 5,268 Deferred acquisition costs 40,550 5,017 (5,017) (3a) 40,550 Value of business acquired 17,318 0 12,683 (3b) 30,001 Goodwill 22,339 7,044 (7,044) (4a) 33,027 10,688 (4b) Other assets 13,902 2,709 517 (1a) 17,128 ------------------------------------- ---------- Total assets $740,370 $140,950 $(24,005) $ 857,315 ===================================== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Policy liabilities and accruals: Future policy benefits, losses and claims $354,656 $ 58,908 $ 573 (5a) $ 414,137 Unearned premiums 34,058 9,011 0 43,069 Other policy claims and benefits payable 161,164 10,772 434 (5b) 172,370 ------------------------------------- ---------- 549,878 78,691 1,007 629,576 Deferred reinsurance gain 17,736 0 0 17,736 Other policyholders' funds 23,605 0 0 23,605 Federal and state income taxes payable 1,163 154 0 1,317 Mortgage notes payable 8,089 0 0 8,089 Long-term debt 38,000 0 7,244 (1a) 45,244 Deferred federal income tax liability 2,811 0 0 2,811 Other liabilities 47,156 2,224 1,725 (7) 51,105 ------------------------------------- ---------- Total liabilities 688,438 81,069 9,976 779,483 ------------------------------------- ---------- Stockholders' equity: Convertible voting preferred stock 0 0 7,500 (1e) 7,500 Non-voting preferred stock 0 0 0 0 Common stock 14 2,503 (2,503) (8) 17 3 (1b) Additional paid-in capital 60,797 436 (436) (8) 79,194 18,397 (1b) Retained earnings 10,905 59,346 (59,346) (8) 10,905 Accumulated other comprehensive income (loss) (19,784) (2,404) 2,404 (8) (19,784) ------------------------------------- ---------- Total stockholders' equity 51,932 59,881 (33,981) 77,832 ------------------------------------- ---------- Total liabilities and stockholders' equity $740,370 $140,950 $(24,005) $ 857,315 ===================================== ==========
See notes to unaudited pro forma financial statements. 21 PRO FORMA STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) (dollars in thousands, except per share data)
HISTORICAL -------------------------------------- PYRAMID PRO FORMA NOTE CERES GROUP, INC. LIFE ADJUSTMENTS REFERENCE PRO FORMA ------------------------------------------------------------------ REVENUES Premiums, net Medical $ 173,489 $ 4,147 $ 0 $ 177,636 Senior and other 50,175 28,817 0 78,992 -------------------------------------- ------------ Total premiums, net 223,664 32,964 0 256,628 Net investment income 11,986 3,844 (1,221) (9a) 14,742 133 (9b) Net realized gains (64) 0 0 (64) Fee and other income 14,496 160 0 14,656 Amortization of deferred reinsurance gain 3,197 0 0 3,197 -------------------------------------- ------------ 253,279 36,968 (1,088) 289,159 -------------------------------------- ------------ BENEFITS, LOSSES AND EXPENSES Benefits, claims, losses and settlement expenses Medical 132,017 3,189 0 135,206 Senior and other 39,564 20,977 0 60,541 -------------------------------------- ------------ Total benefits, claims, losses and settlement expenses 171,581 24,166 0 195,747 Selling, general and administrative expenses 80,925 10,781 0 91,706 Net amortization and change in deferral of acquisition (14,937) (307) (1,366) (10a) (17,802) costs and value of business acquired (1,192) (10b) Amortization of goodwill 517 0 214 (11) 731 Interest expense and financing costs 2,337 0 362 (12a) 2,757 0 0 58 (12b) -------------------------------------- ------------ 240,423 34,640 (1,924) 273,139 Income before federal income taxes 12,856 2,328 836 16,020 Federal income tax expense 4,500 822 368 (13) 5,690 -------------------------------------- ------------ NET INCOME (LOSS) $ 8,356 $ 1,506 $ 468 $ 10,330 ====================================== ============ EARNINGS (LOSS) PER COMMON SHARE Basic $ 0.61 $ 0.56 Diluted $ 0.58 $ 0.54 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 13,732,688 4,553,839 (1b)(1e) 18,286,527 Diluted 14,409,676 4,611,582 (1b)(1e)(1f) 19,021,258
See notes to unaudited pro forma financial statements. 22 PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1999 (UNAUDITED) (dollars in thousands, except per share data)
HISTORICAL ---------------------------------------- PYRAMID PRO FORMA NOTE CERES GROUP, INC. LIFE ADJUSTMENTS REFERENCE PRO FORMA ------------------------------------------------------------------ REVENUES Premiums, net Medical $ 251,876 $10,571 $ 0 $ 262,447 Senior and other 75,870 52,227 0 128,097 -------------------------------------- ----------- Total premiums, net 327,746 62,798 0 390,544 Net investment income 21,362 7,179 (2,441) (9a) 26,365 265 (9b) Net realized gains 107 (1) 0 106 Fee and other income 17,410 779 0 18,189 Amortization of deferred reinsurance gain 5,468 0 0 5,468 -------------------------------------- ----------- 372,093 70,755 (2,176) 440,672 -------------------------------------- ----------- BENEFITS, CLAIMS, LOSSES AND SETTLEMENT EXPENSES Benefits, claims, losses and settlement expenses Medical 176,531 7,831 0 184,362 Senior and other 56,572 36,963 0 93,535 -------------------------------------- ----------- Total benefits, claims, losses and settlement expenses 233,103 44,794 0 277,897 Selling, general and administrative expenses 137,932 20,149 0 158,081 Net amortization and change in deferral of acquisition (21,892) 142 (3,487) (10a) (27,621) costs and value of business acquired (2,384) (10b) Amortization of goodwill 1,042 0 428 (11) 1,470 Interest expense and financing costs 3,902 0 724 (12a) 4,741 115 (12b) -------------------------------------- ----------- 354,087 65,085 (4,604) 414,568 Income before federal income taxes 18,006 5,670 2,428 26,104 Federal income tax expense 6,302 1,991 1,000 (13) $ 9,293 -------------------------------------- ----------- NET INCOME (LOSS) $ 11,704 $ 3,679 $ 1,428 $ 16,811 ====================================== =========== EARNINGS (LOSS) PER COMMON SHARE Basic $ 0.88 $ 0.94 Diluted $ 0.77 $ 0.85 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 13,328,339 4,553,839 (1b)(1e) 17,882,178 Diluted 15,233,899 4,611,582 (1b)(1e)(1f) 19,845,481
See notes to unaudited pro forma financial statements. 23 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (1) The following adjustments reflect the funding of the acquisition purchase price of $67,500,000: (a) Proceeds from Chase Securities arranged credit agreement of $7,244,000 less $517,000 in deferred loan fees paid. (b) Proceeds from private placement of 3,333,334 shares of common stock of $20,000,000 less placement fees of $1,600,000. (c) Extraordinary dividend paid by Pyramid to UICA of $25,000,000 prior to purchase. (d) Cash of $9,873,000 from Continental General Life Insurance Company a subsidiary of Ceres. (e) Issuance of 75,000 shares of Ceres Convertible Preferred Voting Stock, initially convertible into 1,220,505 of Ceres Common Stock, to UICA of $7,500,000. (f) Reflects 57,743 additional warrants issued pursuant to antidilution adjustment provision contained in the existing warrants. (2) (a) Records the fair market value adjustment of the investment portfolio as of the purchase date. (b) Reflects the increase in the fair value of the Pyramid home office building, from $375,000 to $1,600,000. (3) In accordance with the purchase method of accounting, the purchase cost is allocated to the assets and liabilities of Pyramid based upon their fair values. The existing balance of former capitalized expenses (deferred acquisition costs) is eliminated. A new value of the business in force is calculated using current assumptions and is categorized as value of business acquired. These assumptions (i.e. mortality and morbidity projections, interest rates, and expenses, etc.) varied from those used when the Company originally placed the existing business in force. (a) Eliminates the existing deferred acquisition costs. (b) Establishes a new value of business acquired on existing business as of the purchase date. (4) (a) Eliminates historical Goodwill. (b) Records cost in excess of fair value of Pyramid net assets acquired (Goodwill). 24 NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (5) In addition to a review and a new calculation of the value of the existing business in force, a review was also made of the various active life and claim reserves that were established on a historical basis. (a) Increases reserves of certain life and long term care products offset by elimination of unnecessary loss reserves on major medical business to adopt Ceres' standards and practices of determining reserve liabilities. (b) Adjusts claim reserves of certain health products based upon emerging experience. (6) Adjusts deferred tax asset for purchase accounting adjustments. (7) Records costs directly associated with acquisition. (8) Adjustment to eliminate Pyramid's historical equity. (9) (a) Decrease in investment income due to net cash decrease of $9,873,000 at Ceres and $25,000,000 extraordinary dividend paid by Pyramid to Unitrin (34,873,000 x 7%). (b) Record accrual of discount of $265,000 based upon revaluation of investment portfolio to current market value for the 12 months ended December 31, 1999 and $133,000 for the six months ended June 30, 2000. (10) (a) Eliminates prior amortization of deferred acquisition costs of $142,000 for the 12 months ended December 31, 1999 and net capitalization of $307,000 for the six months ended June 30, 2000. Record net capitalization of expenses for new business of 1999 and for the first six months of 2000 only, of $3,345,000 and $1,673,000 respectively. (b) Records net capitalization of adjusted value of business acquired, of $2,384,000 for the 12 months ended December 31, 1999 and $1,192,000 for the six months ended June 30, 2000. (11) Record the amortization of Goodwill over 25 years of $428,000 for the 12 months ended December 31, 1999 and $214,000 for the six months ended June 30, 2000. (12) (a) Record interest expense of $724,000 on bank financing used to fund the acquisition ($7,244,000 x 10%) for the 12 months ended December 31, 1999 and $362,000 for the six months ended June 30, 2000. (b) Record the amortization of deferred loan fees of $115,000 for the 12 months ended December 31, 1999 and $58,000 for the six months ended June 30, 2000. (13) Records income tax expense (benefit) of the pro forma adjustments. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: October 6, 2000 CERES GROUP, INC. By: /s/ Charles E. Miller, Jr. -------------------------------- Chief Financial Officer EX-23 2 l84240aex23.txt EXHIBIT 23 1 Exhibit 23 Consent of Independent Auditors The Board of Directors The Pyramid Life Insurance Company We consent to the inclusion of our report dated March 31, 2000, with respect to the balance sheet of The Pyramid Life Insurance Company as of December 31, 1999, and the related statements of income, cash flows, stockholder's equity and comprehensive income, for the year ended December 31, 1999, which report appears in the Form 8-K/A of Ceres Group, Inc. dated October 6, 2000. /s/ KPMG LLP Chicago, Illinois October 6, 2000 -----END PRIVACY-ENHANCED MESSAGE-----