CERG Ceres (MM)

Ceres Group Reports First Quarter 2004 Results CLEVELAND, May 5 /PRNewswire-FirstCall/ -- For the quarter: -- Net operating income of $4.2 million ($0.12 per share) -- Net income of $6.2 million ($0.18 per share) -- Senior Segment pre-tax operating income of $2.6 million -- Medical Segment pre-tax operating income of $4.5 million Ceres Group, Inc. (NASDAQ:CERG) today reported net operating income of $4.2 million ($0.12 per share), excluding $0.1 million from net realized investment gains and $1.9 million ($0.05 per share) from the reduction in the deferred tax valuation allowance for the first quarter of 2004. This compares to net operating income of $3.4 million ($0.10 per share) for the first quarter of 2003, excluding $0.4 million ($0.01 per share) from net realized investment gains and income of $3.6 million ($0.11 per share) from the discontinued operations of Pyramid Life Insurance Company. Net income was $6.2 million ($0.18 per share) in the first quarter of 2004, compared to $7.4 million ($0.22 per share) for the first quarter of 2003, including $3.6 million ($0.11 per share) from discontinued operations. (Logo: http://www.newscom.com/cgi-bin/prnh/20000315/CRLOGO ) "Our first quarter results show the continuing positive impact of our balanced strategy," said Tom Kilian, president and chief executive officer of Ceres. "Both business segments were profitable, and we improved loss ratios while also increasing new sales compared with the same period a year ago. We are focused on delivering consistent results by growing the Senior Segment and maximizing profitability in the Medical Segment." During the first quarter, A.M. Best upgraded the financial strength rating of Central Reserve Life Insurance Company (CRL) to B+ (Very Good) from B (Fair) and affirmed the B+ financial strength rating of Continental General Insurance Company (CGI). Fitch Ratings upgraded the insurer financial strength rating of CRL to 'BBB' from 'BBB-' and affirmed the 'BBB' rating for CGI. "We are very pleased that A.M. Best and Fitch Ratings took these rating actions," Kilian added. "These upgrades clearly demonstrate that our financial position is improved and our business plan is working." Segment Results Ceres reports its financial results in two primary business segments: Senior and Medical. For 2003, the segment results exclude the discontinued operations of Pyramid Life Insurance Company, which was sold on March 31, 2003. Senior Segment (Medicare supplement, long-term care, dental, life insurance, and annuities) Pre-tax operating income for the quarter was $2.6 million, compared to pre-tax operating income of $2.2 million in the first quarter of 2003. Benefits, claims, losses and settlement expenses in the Senior Segment were $33.8 million, which was comparable to the first quarter of 2003. The Senior Segment benefit and claims loss ratio was 77.4%, compared to 78.9% in the first quarter of 2003. The improvement in the Senior Segment results in the first quarter of 2004 was due primarily to the reduction in Medicare supplement loss ratio from 74.4% in the first quarter of 2003 to 69.1% in the same period in 2004. The improvement in the Medicare supplement loss ratio was partially offset by higher senior life mortality in the first quarter of 2004. "We are particularly encouraged with the sales results for our Senior Segment this quarter," Kilian said. "New sales of our cornerstone product, Medicare supplement, increased substantially compared to the fourth quarter of 2003 as well as the same period a year ago. The increase in first quarter Medicare supplement sales will contribute to premium growth as we move through the balance of 2004. Consistent with 2003 results, Senior Segment earnings are lower in the first quarter due to paying Medicare deductibles in the first months of the year. We remain committed to our plan of growing this segment by focusing on competitive markets, refining our product portfolio and managing relationships with new and established producers." Medical Segment (catastrophic and comprehensive medical plans) Pre-tax operating income for the quarter was $4.5 million, compared to pre-tax operating income of $3.8 million in the first quarter of 2003. Benefits, claims, losses and settlement expenses in the Medical Segment were $42.8 million, compared to $62.5 million in the first quarter of 2003. The Medical Segment benefit and claims loss ratio was 65.6%, compared to 73.4% in the first quarter of 2003. The first quarter loss ratio reflects the seasonal nature of claim payment patterns for this product line. The loss ratio in the Medical Segment is expected to be higher in the balance of 2004. In addition, results for the quarter were impacted by a $3.8 million decline in deferred acquisition costs (DAC) in the Medical Segment, due to higher assumed lapse rates on existing business. The company continues to maintain a conservative approach of deferring new business costs. The rate of decline on the deferred acquisition cost asset is expected to moderate in subsequent quarters. "Results in this segment demonstrate the success of our selective marketing approach," Kilian said. "New sales increased compared with the fourth quarter of 2003, as well as the same period a year ago. We will continue targeting markets in the most profitable states, refining our products and pricing, and expanding our relationships with new and experienced producers. These measures, along with careful monitoring, will help us remain competitive and profitable in this unpredictable market." Outlook "Overall, our results show that our strategy is working," Kilian said. "We believe our Senior Segment has the financial strength, technology and administrative platform to support successful expansion. At the same time, our niche strategy for our Medical Segment will help ensure earnings stability. Our goal continues to be striking the right balance between our business segments." As previously stated, the company expects to achieve net operating income per diluted share of $0.53 for 2004, based on the company's prospects for growth in the Senior Segment and continued profitability in the Medical Segment. Net operating income excludes certain items that, in the opinion of management, are not indicative of overall operating trends. In the company's results for the first quarter of 2004 and its outlook for 2004, net operating income excludes the impact of net realized investment gains, and the reduction in the deferred tax valuation allowance. A conference call with management regarding first quarter 2004 results is scheduled for 10:00 a.m. (Eastern) on Thursday, May 6, 2004. To listen to the live conference call over the Internet, go to http://www.ceresgp.com/ or http://www.firstcallevents.com/service/ajwz405384486gf12.html . 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. CERES GROUP, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited (in thousands, except per share amounts) Three Months Ended March 31, ------------------------ 2004 2003 --------- --------- REVENUES Premiums, net Medical $65,227 $85,119 Senior and other 43,602 42,857 --------- --------- Total premiums, net 108,829 127,976 Net investment income 6,263 5,524 Net realized gains 108 584 Fee and other income 4,808 6,342 Amortization of deferred reinsurance gain 409 657 --------- --------- 120,417 141,083 --------- --------- BENEFITS, LOSSES AND EXPENSES Benefits, claims, losses and settlement expenses Medical 42,814 62,506 Senior and other 33,750 33,800 --------- --------- Total benefits, claims, losses and settlement expenses 76,564 96,306 Selling, general and administrative expenses 33,611 38,170 Net amortization and change in acquisition costs and value of business acquired 3,474 401 Interest expense and financing costs 172 429 --------- --------- 113,821 135,306 --------- --------- Income from continuing operations before federal income taxes 6,596 5,777 Federal income tax expense 422 2,020 --------- --------- Income from continuing operations 6,174 3,757 --------- --------- Discontinued operations Income from operations of Pyramid Life (less tax expense of $3,223) - 5,732 Loss on sale of Pyramid Life (less tax benefit of $79) - (2,110) --------- --------- Income from discontinued operations - 3,622 --------- --------- Net income $6,174 $7,379 ========= ========= Basic earnings per share Continuing operations $0.18 $0.11 Discontinued operations - 0.11 --------- --------- Net income $0.18 $0.22 ========= ========= Diluted earnings per share Continuing operations $0.18 $0.11 Discontinued operations - 0.11 --------- --------- Net income $0.18 $0.22 ========= ========= Basic weighted average shares outstanding 34,394 34,236 Diluted weighted average shares outstanding 35,038 34,236 CERES GROUP, INC. and SUBSIDIARIES RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Unaudited (in thousands, except per share amounts) In this press release, the company presented net operating income, net operating income per share, and Medical and Senior Segment pre-tax operating income, which are non-GAAP financial measures. Management believes that these measures of profitability provide a meaningful presentation of the underlying earnings of the company's operations. Net operating income, net operating income per share, and Medical and Senior Segment pre-tax operating income exclude certain items that, in the opinion of management, are not indicative of overall operating trends. For the periods presented, net operating income, net operating income per share, and Medical and Senior Segment pre-tax operating income exclude realized gains on the sale of investments, and reductions to the valuation allowance for deferred taxes, and, for 2003, the results of the discontinued operations of Pyramid Life Insurance Company (a subsidiary that was sold on March 31, 2003). The following is a reconciliation to the most directly comparable GAAP financial measure: Three Months Ended March 31, ------------------------ 2004 2003 --------- --------- NET OPERATING INCOME Net operating income $4,203 $3,377 Net realized gains 108 584 Income taxes on net realized gains (1) (38) (204) Reduction to the valuation allowance for deferred taxes 1,901 - --------- --------- Income from continuing operations $6,174 $3,757 ========= ========= NET OPERATING INCOME PER SHARE DATA (DILUTED) Net operating income per share $0.12 $0.10 Net realized gains, net of tax (1) - 0.01 Reduction to the valuation allowance for deferred taxes 0.05 - --------- --------- Net income per share from continuing operations $0.18 $0.11 ========= ========= SENIOR SEGMENT PRE-TAX OPERATING INCOME Senior Segment pre-tax operating income $2,565 $2,196 Net realized gains (losses) (36) 299 --------- --------- Senior Segment profit before federal income taxes $2,529 $2,495 ========= ========= MEDICAL SEGMENT PRE-TAX OPERATING INCOME Medical Segment pre-tax operating income $4,533 $3,812 Net realized gains 34 177 --------- --------- Medical Segment profit before federal income taxes $4,567 $3,989 ========= ========= (1) Taxes on net realized gains are based upon a 35% effective tax rate for all periods. Note: Income per share amounts may not total due to rounding of individual components. CERES GROUP, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) March 31, December 31, 2004 2003 --------- --------- (Unaudited) ASSETS Investments $501,812 $484,280 Cash and cash equivalents 22,955 26,394 Reinsurance receivable 141,785 143,397 Deferred acquisition costs 66,146 69,609 Value of business acquired 11,760 13,034 Goodwill and licenses 14,097 14,097 Other assets 20,041 23,103 --------- --------- Total assets $778,596 $773,914 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Policy liabilities and benefits accrued $495,475 $504,493 Deferred reinsurance gain 9,047 9,456 Other policyholders' funds 21,866 20,821 Debt 12,438 13,000 Other liabilities 42,893 41,005 --------- --------- Total liabilities 581,719 588,775 Stockholders' equity 196,877 185,139 --------- --------- Total liabilities and stockholders' equity $778,596 $773,914 ========= ========= Equity per common share: After accumulated other comprehensive income(1) $5.72 $5.38 Before accumulated other comprehensive income(1) 5.35 5.17 Book value per share excluding goodwill and licenses 5.31 4.97 (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 (excluding operations of Pyramid Life Insurance Company) Unaudited (in thousands) Three Months Ended March 31, ------------------------ 2004 2003 --------- --------- MEDICAL Revenues Net premiums $65,227 $85,119 Net investment income 1,246 1,475 Net realized gains 34 177 Other income 4,725 6,491 --------- --------- 71,232 93,262 --------- --------- Expenses Benefits and claims 42,814 62,506 Other operating expenses 23,851 26,767 --------- --------- 66,665 89,273 --------- --------- Segment profit before federal income taxes $4,567 $3,989 ========= ========= SENIOR AND OTHER Revenues Net premiums $43,602 $42,857 Net investment income 5,017 4,040 Net realized gains (losses) (36) 299 Other income 492 508 --------- --------- 49,075 47,704 --------- --------- Expenses Benefits and claims 33,750 33,800 Other operating expenses 12,796 11,409 --------- --------- 46,546 45,209 --------- --------- Segment profit before federal income taxes $2,529 $2,495 ========= ========= CORPORATE AND OTHER Revenues Net investment income $-- $9 Net realized gains 110 108 --------- --------- 110 117 --------- --------- Expenses Interest expense and financing costs 172 429 Other operating expenses 438 395 --------- --------- 610 824 --------- --------- Segment loss before federal income taxes $(500) $(707) ========= ========= Income from continuing operations before federal income taxes $6,596 $5,777 ========= ========= Medical loss ratio 65.6% 73.4% Senior loss ratio 77.4% 78.9% Overall loss ratio 70.4% 75.3% 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 to mid-size 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 agents and its electronic distribution system. For more information, visit http://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 claims liabilities, adverse outcomes in litigation, rising healthcare costs, business conditions and competition in the healthcare industry, developments in healthcare reform and other regulatory issues (including failure to meet statutory capital requirements), ability to develop and administer competitive products, performance of our reinsurers and failure to comply with financial and other covenants in our loan agreements, and the failure to successfully implement the business plans for the company and its subsidiaries. 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, 2003, 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. http://www.newscom.com/cgi-bin/prnh/20000315/CRLOGO http://photoarchive.ap.org/ DATASOURCE: Ceres Group CONTACT: David I. Vickers, Chief Financial Officer, +1-440-878-2941, or Gayle M. Vixler, Senior Vice President, +1-440-572-8848, both of Ceres Group Web site: http://www.ceresgp.com/ http://www.firstcallevents.com/service/ajwz405384486gf12.html

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