CERG Ceres (MM)

Ceres Group, Inc. (NASDAQ:CERG): For the quarter: -- Net income of $3.4 million ($0.10 per share) -- Senior Segment pre-tax income of $3.5 million -- Medical Segment pre-tax income of $0.9 million For the nine months: -- Net income of $13.0 million ($0.37 per share) -- Senior Segment pre-tax income of $11.0 million -- Medical Segment pre-tax income of $7.4 million Ceres Group, Inc. (NASDAQ:CERG) today reported net income of $3.4 million ($0.10 per share), for the third quarter of 2005, including $0.5 million ($0.01 per share) from net realized investment gains and a $0.8 million ($0.02 per share) federal income tax benefit related to the reduction of federal income tax reserves with respect to recently closed tax years. This compares to net income of $5.4 million ($0.16 per share) for the third quarter of 2004, including $0.1 million from net realized investment gains, a $2.1 million ($0.06 per share) charge from the California litigation settlements, and a $3.0 million ($0.09 per share) benefit related to a decrease in the valuation allowance for deferred taxes. For the first nine months of 2005, the company reported net income of $13.0 million ($0.37 per share), including $0.4 million ($0.01 per share) from net realized investment gains, and a $1.8 million ($0.05 per share) federal income tax benefit related to the reduction of federal income tax reserves associated with the elimination of the company's untaxed policyholder surplus account exposure and recently closed tax years. This compares to net income of $16.5 million ($0.47 per share) for the first nine months of 2004, including $0.3 million from net realized investment gains ($0.01 per share), a $2.1 million ($0.06 per share) charge from the California litigation settlements, and a $5.0 million ($0.14 per share) benefit related to the decrease in the valuation allowance for deferred taxes. "In the third quarter, we are pleased that our business segments remained profitable and new sales increased in both segments," said Tom Kilian, president and chief executive officer of Ceres. "At the same time, we faced challenges due to unfavorable experience in our long-term care business as well as a higher-than-expected Medicare supplement loss ratio. As we continue to address our Medicare supplement loss ratio, we still believe that this business will provide earnings growth in the long term. "With our increased new sales in the third quarter, we are beginning to see results from the investments we made in marketing this year," Kilian said. "We attribute our sales improvements to the products we introduced earlier this year and to our new career distribution channel. "We are also pleased to announce that we have completed the $10 million buyback of our stock that we first announced in May of this year," Kilian added. "We believe that these repurchases were an attractive investment for us and reflect our ongoing confidence in the company." Segment Results Ceres reports its financial results in two primary business segments: Senior and Medical. Senior Segment (Medicare supplement, long-term care, dental, life insurance, and annuities) Pre-tax income for the quarter was $3.5 million, including $0.6 million from net realized investment gains, compared to $5.8 million in the third quarter of 2004, including $0.1 million from net realized investment gains. Pre-tax income for the first nine months was $11.0 million, including $0.1 million from net realized investment gains. This compares to pre-tax income of $13.4 million for the same period of 2004. Benefits, claims, losses and settlement expenses in the Senior Segment were $41.6 million, compared to $34.5 million for the third quarter of 2004. The Senior Segment benefit and claims loss ratio was 80.5%, compared to 74.7% in the third quarter of 2004. The increase in the loss ratio was due primarily to unfavorable long-term care experience in the third quarter of 2005, compared to favorable experience and development of long-term care reserves in the third quarter of 2004. The Medicare supplement loss ratio was higher than expected for the third quarter of 2005 at 75.5%, due to adverse development in the June 30, 2005 claim reserves, compared to 75.2% for the third quarter of 2004. For the nine months, benefits, claims, losses and settlement expenses in the Senior Segment were $120.0 million, compared to $101.8 million for the first nine months of 2004. The Senior Segment benefit and claims loss ratio was 78.7%, compared to 75.6% for the first nine months of 2004. This increase was due primarily to an increase in the Medicare supplement loss ratio from 72.3% in the first nine months of 2004 to 75.0% in the first nine months of 2005, as well as unfavorable long-term care experience in the third quarter of 2005. The Medicare supplement loss ratio is expected to be 71.1% in the fourth quarter consistent with the historical seasonality of this product. For the full year 2005, the Medicare supplement loss ratio is now expected to be approximately 74.0%, compared to 71.9% for 2004. "Premiums in our Senior Segment rose 12%, or $5.5 million, compared to the third quarter of 2004," Kilian said. "We are encouraged by this increase which is a result of both new business and 2005 rate increases. "Although the Medicare supplement market remains competitive, sales of our Medicare supplement plans increased compared to last quarter and the same quarter a year ago," Kilian added. "We are also pleased with the early results of our new career distribution channel. Currently, we have appointed 18 regional sales managers and approximately 180 agents to focus specifically on marketing our senior product portfolio. "We have begun marketing Medicare Part D prescription drug plans through our relationship with Coventry Health Care, Inc. and its affiliates," Kilian continued. "Introductory mailings have been sent to approximately 130,000 existing senior insureds. Part D plans enhance our senior portfolio and present increased cross-selling opportunities for agents." Medical Segment (catastrophic and comprehensive medical plans) Pre-tax income for the quarter was $0.9 million, including $0.1 million from net realized investment gains, compared to a pre-tax loss of $1.8 million in the third quarter of 2004, including a $3.3 million pre-tax charge from the California litigation settlements. Pre-tax income for the first nine months of 2005 was $7.4 million, including $0.2 million from net realized investment gains. This compares to $5.8 million in the first nine months of 2004, including the California litigation settlements. Benefits, claims, losses and settlement expenses in the Medical Segment were $39.1 million, compared to $44.5 million in the third quarter of 2004. The Medical Segment benefit and claims loss ratio was 72.1%, compared to 74.0% for the third quarter of 2004. The increased severity of large claims in the quarter was more than offset by favorable reserve development. For the nine months, benefits, claims, losses and settlement expenses in the Medical Segment were $116.4 million, compared to $131.2 million for the first nine months of 2004. The Medical Segment benefit and claims loss ratio was 70.2%, compared to 69.8% for the first nine months of 2004. The loss ratio in the Medical Segment is expected to be higher in the fourth quarter of 2005 consistent with historical seasonality patterns. "Our Medical Segment sales were also positive this quarter," Kilian said. "We have introduced our new Advantage Series of major medical products designed to offer customers a choice of benefit levels and prices. These higher margin products have been well received by our agents, as evidenced by our initial sales results." Outlook Due to the higher-than-expected Medicare supplement loss ratio during the first nine months of the year and the unfavorable long-term care experience in the third quarter, the company is adjusting its earnings guidance for the full year 2005. The company now expects net income per diluted share of $0.42 to $0.45 for the full year (including the $0.05 per share federal income tax benefit related to the reduction of the federal income tax reserves associated with the elimination of the company's untaxed policyholder surplus account exposure and recently closed tax years) versus its prior estimate of $0.48 to $0.51 per diluted share. In the company's outlook for 2005, net income per diluted share excludes the impact of net realized gains or losses. "Our Medicare supplement loss ratio continues to adversely impact our earnings performance," Kilian said. "We are taking steps to address this, including filing for appropriate 2006 rate increases on this business. "In addition to ongoing actuarial analysis and pricing adjustments in both segments, we are pursuing cost reductions as well as product development. All of these strategic initiatives are focused on improving our profitability and margins. In spite of the challenges we faced this year, we remain confident in our plan to position the company for the long-term." A conference call with management regarding third quarter 2005 results is scheduled for 10:00 a.m. (Eastern) on November 3, 2005. To listen to the live conference call over the Internet, go to www.ceresgp.com or http://phx.corporate-ir.net/playerlink.zhtml?c=71415&s=wm&e=1153092. To listen to the webcast, please log onto this site at least 15 minutes prior to the call to register, download and install any necessary audio software. For those who cannot listen to the live broadcast, a replay will be available after the call. FINANCIAL TABLES TO FOLLOW -0- *T CERES GROUP, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited (in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 2005 2004 2005 2004 --------- --------- --------- --------- REVENUES Premiums, net Medical $ 54,244 $ 60,097 $165,917 $187,989 Senior and other 51,662 46,182 152,533 134,698 -------- -------- -------- -------- Total premiums, net 105,906 106,279 318,450 322,687 Net investment income 6,753 6,285 19,634 19,234 Net realized gains 750 163 646 401 Fee and other income 3,970 4,800 12,721 14,663 -------- -------- -------- -------- 117,379 117,527 351,451 356,985 -------- -------- -------- -------- BENEFITS, LOSSES AND EXPENSES Benefits, claims, losses and settlement expenses Medical 39,095 44,468 116,431 131,167 Senior and other 41,574 34,494 120,027 101,802 -------- -------- -------- -------- Total benefits, claims, losses and settlement expenses 80,669 78,962 236,458 232,969 Selling, general and administrative expenses 33,292 34,528 97,613 101,102 Net (deferral) amortization and change in acquisition costs and value of business acquired (787) 187 (320) 4,626 Interest expense and financing costs 178 169 533 507 -------- -------- -------- -------- 113,352 113,846 334,284 339,204 -------- -------- -------- -------- Income before federal income taxes 4,027 3,681 17,167 17,781 Federal income tax expense (benefit) 597 (1,729) 4,216 1,305 -------- -------- -------- -------- Net income $ 3,430 $ 5,410 $ 12,951 $ 16,476 ======== ======== ======== ======== Net income per share Basic $ 0.10 $ 0.16 $ 0.38 $ 0.48 Diluted 0.10 0.16 0.37 0.47 Weighted average shares outstanding Basic 34,206 34,495 34,415 34,450 Diluted 34,377 34,755 34,654 35,025 CERES GROUP, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) September 30, December 31, 2005 2004 ------------- ------------ (Unaudited) ASSETS Investments $ 469,799 $ 494,951 Cash and cash equivalents 46,753 22,635 Reinsurance receivable 134,232 130,345 Deferred acquisition costs 69,797 67,074 Value of business acquired 9,869 10,952 Goodwill and licenses 14,097 14,097 Other assets 20,818 25,939 ------------ ----------- Total assets $ 765,365 $ 765,993 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Policy liabilities and benefits accrued $ 504,256 $ 489,829 Deferred reinsurance gain 5,620 6,562 Other policyholders' funds 14,686 19,016 Debt 8,250 10,750 Other liabilities 29,065 35,018 ------------ ----------- Total liabilities 561,877 561,175 Stockholders' equity 203,488 204,818 ------------ ----------- Total liabilities and stockholders' equity $ 765,365 $ 765,993 ============ =========== Equity per common share: After accumulated other comprehensive income (1) $ 6.12 $ 5.93 Before accumulated other comprehensive income (1) 6.06 5.72 Book value per share excluding goodwill and licenses 5.70 5.52 -------------- (1) Accumulated other comprehensive income relates primarily to the net unrealized gain (loss) on available-for-sale securities. CERES GROUP, INC. and SUBSIDIARIES INDUSTRY SEGMENT DATA Unaudited (in thousands) Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 2005 2004 2005 2004 --------- --------- --------- --------- Medical Revenues Net premiums $ 54,244 $ 60,097 $165,917 $187,989 Net investment income 742 964 2,603 3,458 Net realized gains (losses) 82 (6) 204 20 Fee and other income 3,477 4,236 11,171 12,893 -------- -------- -------- -------- 58,545 65,291 179,895 204,360 -------- -------- -------- -------- Expenses Benefits and claims 39,095 44,468 116,431 131,167 Other operating expenses 18,539 22,593 56,106 67,414 -------- -------- -------- -------- 57,634 67,061 172,537 198,581 -------- -------- -------- -------- Segment profit (loss) before federal income taxes $ 911 $ (1,770) $ 7,358 $ 5,779 ======== ======== ======== ======== Senior and Other Revenues Net premiums $ 51,662 $ 46,182 $152,533 $134,698 Net investment income 5,943 5,317 16,911 15,772 Net realized gains 560 56 104 47 Fee and other income 493 564 1,550 1,770 -------- -------- -------- -------- 58,658 52,119 171,098 152,287 -------- -------- -------- -------- Expenses Benefits and claims 41,574 34,494 120,027 101,802 Other operating expenses 13,613 11,837 40,086 37,096 -------- -------- -------- -------- 55,187 46,331 160,113 138,898 -------- -------- -------- -------- Segment profit before federal income taxes $ 3,471 $ 5,788 $ 10,985 $ 13,389 ======== ======== ======== ======== Corporate and Other Revenues Net investment income $ 68 $ 4 $ 120 $ 4 Net realized gains 108 113 338 334 -------- -------- -------- -------- 176 117 458 338 -------- -------- -------- -------- Expenses Interest expense and financing costs 178 169 533 507 Other operating expenses 353 285 1,101 1,218 -------- -------- -------- -------- 531 454 1,634 1,725 -------- -------- -------- -------- Segment loss before federal income taxes $ (355) $ (337) $ (1,176) $ (1,387) ======== ======== ======== ======== Income before federal income taxes $ 4,027 $ 3,681 $ 17,167 $ 17,781 ======== ======== ======== ======== Medical loss ratio 72.1% 74.0% 70.2% 69.8% Senior loss ratio 80.5% 74.7% 78.7% 75.6% Overall loss ratio 76.2% 74.3% 74.3% 72.2% *T About Ceres Group Ceres Group, Inc., through its insurance subsidiaries, provides a wide array of health and life insurance products through two primary business segments. Ceres' Medical Segment includes major medical health insurance for individuals, families, associations and small businesses. The Senior Segment includes senior health, life and annuity products for Americans age 55 and over. To help control medical costs, Ceres also provides medical cost management services to its insureds. Ceres' nationwide distribution channels include independent and career agents, as well as electronic distribution systems. Ceres is included in the Russell 3000(R) Index. For more information, visit www.ceresgp.com. This news release contains certain forward-looking statements with respect to the financial condition, results of operations and business of the company. Forward-looking statements are statements other than historical information or statements of current condition. In light of the risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements herein should not be regarded as representation by the company or any other person that the objectives or plans of the company will be achieved. Many factors could cause actual results to differ materially from those contemplated by such forward-looking statements, including, among others, failure to accurately predict loss ratios and improvements in our business, business conditions and competition in the healthcare industry, the failure to successfully implement the business plans (including the company's growth strategy) for the company and its subsidiaries, failure to accurately predict claims liabilities, ability to institute necessary rate increases, ability to develop, market and administer new and competitive products, developments in healthcare reform and other regulatory issues (including failure to meet statutory capital requirements), rising healthcare costs, adverse outcomes in litigation and related matters, failure to comply with financial and other covenants in our loan agreement, and performance of our reinsurers. This review of important factors should not be construed as exhaustive. Investors and others should refer to Ceres' filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended December 31, 2004, and its quarterly reports on Form 10-Q and other periodic filings, for a description of the foregoing and other factors. Ceres undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.