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Ceres Group, Inc.

CERES GROUP, INC.

17800 ROYALTON ROAD
CLEVELAND, OHIO 44136
(440) 878-2941
(440) 878-2979

August 9, 2005

VIA FACSIMILE (202-772-9217)

United States Securities and Exchange Commission

Mail Stop 6010

Washington, D.C. 20549

    Attn:

    Ibolya Ignat, Staff Accountant

Division of Corporation Finance

    Re:

    Ceres Group, Inc.

Form 10-K for Fiscal Year Ended December 31, 2004

Filed March 18, 2005

File No. 000-08483

Dear Ms. Ignat:

We are in receipt of your comment letter to Ceres, dated July 13, 2005, regarding the Commission’s
limited review of Ceres’ Form 10-K for the year ended December 31, 2004. Our responses to your
comments follow and are numbered to correspond to the numbered paragraphs in your letter.

Form 10-K for the fiscal year ended December 31, 2004

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,
page 22

Critical Accounting Policies, page 22

Liabilities for Other Policy Claims and Benefits Payable, page 22

    1.

    We note throughout the document that management discusses the inherent uncertainty in
establishing reserves for loss and loss adjustment expenses. Given this inherent uncertainty,
we feel that a more robust discussion of this estimate is appropriate. Please provide to us
the disclosures that you would propose to include in future Forms 10-K that better explains
the judgments and uncertainties surrounding this estimate and the potential impact on your
financial statements. We believe that disclosures explaining the likelihood that any
materially different amounts would be reported under different conditions or using different
assumptions is consistent with the objective of Management’s Discussion and Analysis. The
proposed disclosure should include the following information for each of your lines of
business:

Securities & Exchange Commission

August 9, 2005

Page 2

    •

    Please disclose the reserves accrued as of the latest balance sheet date presented.
The total of these amounts should agree to the amount presented on the balance sheet.

    •

    Please disclose the range of loss reserve estimates as determined by your actuaries.
Discuss the key assumptions used to arrive at management’s best estimate of loss
reserves within that range and what specific factors led management to believe this
amount rather than any other amount within the range represented the best estimate of
incurred losses.

    •

    Please include a better discussion of the uncertainty involved in estimating the
“Future policy benefits, losses and claims” liability.

    2.

    Based on the information disclosed in Note J on page 71, it appears that management
significantly revised its estimate of loss reserves recorded in prior years. Please revise
Management’s Discussion and Analysis to explain the reason for this change in estimate. For
each line of business, include the following disclosures:

    •

    Identify the years to which the change in estimate relates and disclose the amount
of the related loss reserve as of the beginning of the year that was re-estimated.
Discuss and quantify offsetting changes in estimates that increase and decrease the
loss reserve.

    •

    Identify the changes in the key assumptions made to estimate the reserve since the
last reporting date.

    •

    Identify the nature and timing of the change in estimate, explicitly identifying and
describing in reasonable specificity the new events that occurred or additional
information acquired since the last reporting date that led to the change in estimate.

    •

    Ensure the disclosure clearly explains why recognition occurred in the periods that
it did and why recognition was not required in earlier periods.

    •

    Disclose any trends such as, the number of claims incurred, average settlement
amounts, number of claims outstanding at period ends along with average per claim
outstanding, and any other trends, necessary to understand the change in estimate.
Please explain the rationale for a change in estimate that does not correlate with
trends.

RESPONSE TO 1 & 2:

The following is proposed revised and restated disclosure with respect to establishing
reserves for loss and loss adjustment expenses that we would include in future Forms
10-K. We believe that much of this disclosure is already in our 2004 Form 10-K in several
different places (i.e., Note J to our Consolidated Financial Statements and “MD&A –
Critical Accounting Policies”), but we have consolidated the disclosure and have also added
disclosure that better explains the judgments and uncertainties surrounding the estimate
and any potential impact on our financial statements.

Securities & Exchange Commission

August 9, 2005

Page 3

Proposed Disclosure for “MD&A – Critical Accounting Policies – Liabilities for Other
Policy Claims and Benefits Payable”:

The most significant accounting estimate in our audited consolidated financial statements is
our liability for other policy claims and benefits payable.

Major Medical, Medicare Supplement & Other Health

The liability for other policy claims and benefits payable (except for long-term care
disabled life reserves which represented approximately 40% of the total liabilities for
other policy claims and benefits payable at December 31, 2004) consists of actual claims
reported but not paid and estimates of claims incurred but not reported (IBNR).
Liability estimates are developed using actuarial principles and assumptions that
consider, among other things, historical claims payment patterns, claims inventory
levels, network reimbursement changes, historical utilization trends, current levels of
authorized inpatient days, other medical cost inflation factors, in-force levels,
benefit design changes, seasonality, demographic mix change and expected costs to settle
unpaid claims.

We employ actuaries and consultants that have developed, refined and used the same set
of reserve models over the past several years. These reserve models make use of both
historical claim payment patterns as well as emerging medical cost trends to project our
best estimate of claim liabilities. Within these models, historical data of paid claims
is formatted into claim triangles which compare claim incurred dates to the claim
payment dates. This information is analyzed to create “completion factors” that
represent the average percentage of total incurred claims that have been paid through a
given date after being incurred. Completion factors are applied to claims paid through
the financial statement date to estimate the ultimate claim expense incurred for the
current period. Actuarial estimates of claim liabilities are then determined by
subtracting the actual paid claims from the estimate of the ultimate incurred claims.

For the more recent incurred months, the percentage of claims paid to claims incurred in
those months is generally low. As a result, the completion factor methodology is less
reliable for such months. For that reason, incurred claims for recent months are not
projected solely from historical completion and payment patterns. Instead, they are
projected by estimating the claim expense for those months based upon recent claim
expense levels and claim trend levels, or “trend factors.” As these months mature over
time, the two estimates (completion factor and trend) are blended with completion
factors being used exclusively for older months.

A substantial portion of liability estimates relates to the most recent four incurred
months. Changes in the completion and trend factors can have a significant effect on
the liability estimates. A hypothetical 1% increase in claim trend coupled with a 1%
decrease in completion factors could cause a 10% increase in our liability for other
policy claims and benefits payable.

Securities & Exchange Commission

August 9, 2005

Page 4

Long-Term Care Disabled Life Reserves

With respect to long-term care disabled life reserves, the tabular method is used for
all open claims where the eligibility for benefits has been established. The ability to
accurately perform a disabled life reserve calculation is dependent upon the
appropriateness of the continuance tables used. The long-term care continuance tables
are based on a third party actuarial firm’s long-term care guidelines. The continuance
factors are adjusted based on emerging actual-to-expected claim cost data by benefit
type and cause of impairment.

The claim liability model develops estimates of 1) claims in the course of settlement,
2) case reserves, and 3) IBNR. The calculation methodologies for the three specific
reserves are as follows:

Ÿ
     Claims in the Course of Settlement

For each open claim, a claim in the course of settlement amount is calculated,
representing the amount of payments expected to be owed on existing claims for
services received prior to the valuation date but for which benefits have not yet
been paid. This amount is calculated by multiplying the number of days between the
valuation date and the last service date for which benefits have been paid by the
daily benefit of the policy, where the daily benefit is adjusted by the expected
salvage factor. This salvage factor represents the average portion of the full
daily benefit expected to be paid.

Ÿ
     Case Reserves

For each open claim, a case reserve is calculated, representing the present value of
future benefits expected to be incurred for services subsequent to the valuation
date. Each open claim is valued based on the duration and payments since the claim
has been opened, the age and sex of the claimant, and the specific benefits of the
policy (daily benefit, benefit period, presence of inflation protection, etc.).
Continuance tables varying by age, sex and claim type are used to calculate the
expected future length of claim given the individual policy’s benefit history and
maximum benefit amount. This expected future length of claim along with the
salvage-adjusted daily benefit determines the total expected future payments. These
payments are discounted at the GAAP valuation rate (6.125% at December 31, 2004) to
determine the case reserve.

Ÿ
     IBNR

An IBNR reserve is calculated to represent the liability for claims incurred but not
yet reported as of the valuation date. This would include a case reserve portion for
ongoing claims as well as nonrecurring claims for both known and unknown cases.
Historical information is used to establish the amount of IBNR that develops after
various points in time. This information is used to calculate an average IBNR per
policy in-force. Adjustments are made to account for changes in durational mix and
trend. These factors are then applied to the current in-force.

Securities & Exchange Commission

August 9, 2005

Page 5

Adequacy of Liability for Other Policy Claims and Benefits Payable

Claims liabilities are recorded at amounts we estimate to be appropriate. Adjustments
of prior years estimates may result from higher-than-expected medical costs or, as we
have experienced during the last two years, a reduction in projected medical costs in
the period an adjustment was made. Our reserve models in the aggregate have developed
favorably in recent years, suggesting that the accrued liabilities calculated from the
models were more than adequate to cover our ultimate liability for unpaid claims.

The following table reflects the activity in the liability for other policy claims and
benefits payable, including the claims adjustment expenses, net of reinsurance
recoverables:

    December 31,

    2004

    2003

    2002

    (dollars in thousands)

    Gross balance at beginning of year

    $
    129,237

    $
    147,938

    $
    186,783

    Less: Reserves ceded

    25,878

    28,622

    58,078

    Adjusted net beginning balance

    103,359

    119,316

    128,705

    Paid claims and claims adjustments expenses,
net of reinsurance, for

    Current
year

    252,668

    252,789

    268,036

    Prior years

    71,023

    91,655

    136,693

    Total
paid

    323,691

    344,444

    404,729

    Incurred claims and claims adjustment expenses,
net of reinsurance, for

    Current
year

    322,272

    358,567

    368,935

    Prior
years

    (19,596
    )

    (12,995
    )

    8,394

    Total
incurred

    302,676

    345,572

    377,329

    Net reserve balance at end of year

    82,344

    120,444

    101,305

    Plus: Reserves ceded at end of year

    22,076

    25,878

    28,622

    Balance before reinsurance recoveries on paid claims

    104,420

    146,322

    129,927

    Plus: (Decrease) increase in reinsurance recoveries on paid
claims

    (1,717
    )

    (17,085
    )

    18,011

    Gross balance at end of year

    $
    102,703

    $
    129,237

    $
    147,938

The above table indicates a net redundancy in reserves (“Incurred claims and claims
adjustment expenses, net of reinsurance for prior years” divided by “Adjusted net
beginning balance”) of 19.0% in 2003, 10.9% in 2002, and a deficiency of 6.5% in 2001.

Securities & Exchange Commission

August 9, 2005

Page 6

The following is a breakdown of the estimated redundancy (deficiency) by segment:

    December 31,

    2004

    2003

    2002

    (dollars in thousands)

    Medical

    $
    14,038

    $
    9,826

    $
    (6,867
    )

    Senior

    5,558

    3,169

    (1,527
    )

    Total

    19,596

    $
    12,995

    $
    (8,394
    )

Claim reserve estimates are continually monitored and reviewed, and, as estimates
are adjusted, differences are reflected in current operations. We develop best estimate
reserves for all lines of business and do not develop ranges of possible outcomes.
Based on historical deviations from our best estimate, we have generally been within 5%
to 15% of the recorded reserve estimates.

In the Medical Segment, the deficiency in the 2001 reserves, which emerged in 2002, was
due to a significant backlog in claim inventory at December 31, 2001, which contained a
higher-than-anticipated claim trend. As a result of the adverse experience during the
first two quarters of 2002, we cancelled certain blocks of unprofitable business and
exited certain states, which caused significant fluctuations in expected claim trends.
The redundancy in the Medical Segment the last two years reflects our improving claim
trends, stable inventory levels, and adequate provisions for adverse deviation in the
actuarial estimates.

In the Senior Segment, the deficiency in the 2001 reserves, which emerged in 2002, was
due to an increase in cognitive claims in our long-term care block, which caused an
increase in the expected length of claim. We adjusted the continuance tables based on
the emerging adverse experience in 2002. The redundancy, which emerged the last two
years, reflects the improvement in actual claim experience and the reduction in expected
length of stay.

Proposed Additional Disclosure for “MD&A – Critical Accounting Policies”:

Future Policy Benefits, Losses and Claims

Liabilities for future policy reserves for accident and health and traditional life
business are based on the net level premium basis and estimates of future claims,
investment yield, lapses using our experience and actuarial judgment with an allowance
for possible future adverse deviations from expected experience. Interest rates used
range from 4.5% to 6.125%. Original assumptions will continue to be used in subsequent
accounting periods to determine changes in the liability for future policy benefits
(often referred to as the “lock-in” concept) unless a premium deficiency exists. We
review actual experience with respect to investment yields, mortality, morbidity, and
lapses to help insure that existing liabilities, together with the present value of
future premiums, will be sufficient to cover the present value of future benefits and
maintenance costs and to recover u