CERG Ceres (MM)

Ceres Group, Inc. (NASDAQ:CERG) For the quarter: -- Net income of $4.7 million ($0.13 per share) -- Senior Segment pre-tax income of $4.2 million -- Medical Segment pre-tax income of $3.4 million For the six months: -- Net income of $9.5 million ($0.27 per share) -- Senior Segment pre-tax income of $7.5 million -- Medical Segment pre-tax income of $6.4 million Ceres Group, Inc. (NASDAQ:CERG) today reported net income of $4.7 million ($0.13 per share), for the second quarter of 2005, including $0.5 million ($0.01 per share) from net realized investment gains. This compares to net income of $4.9 million ($0.14 per share) for the second quarter of 2004, including $0.1 million from net realized investment gains. For the first six months of 2005, the company reported net income of $9.5 million ($0.27 per share), including $0.6 million ($0.02 per share) from net realized investment gains; $0.7 million ($0.02 per share) from net unrealized investment losses related to securities classified as trading securities; and a $1.0 million ($0.03 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. This compares to net income of $11.1 million ($0.31 per share) for the first six months of 2004, including $0.2 million from net realized investment gains and $1.9 million ($0.05 per share) related to the decrease in the valuation allowance for deferred taxes. "Although both of our business segments were profitable in the first half of 2005, our earnings performance was below our expectations due to a higher-than-expected Medicare supplement loss ratio and higher-than-expected claims severity in our Medical Segment," said Tom Kilian, president and chief executive officer of Ceres. "In addition, sales were not as strong as anticipated in the first half of 2005. Over the last year, we have made a significant investment in our sales efforts by adding qualified sales management, devoting resources to product development and increasing our distribution reach. New product introductions were rolled out in early July, and we are optimistic that they will positively affect future sales and help us achieve improved profit margins. "In May, we announced a stock repurchase program of up to $10 million of our common stock," Kilian added. "In the second quarter, we repurchased 294,646 shares of our common stock, or approximately $1.7 million, in open market transactions. We expect to continue to purchase shares from time to time in the open market or in private transactions. "We are also pleased to announce that in June we entered into an exclusive marketing agreement with Coventry Health Care and its affiliates (NYSE:CVH) to offer to both new customers and our approximately 100,000 current senior insureds Medicare Part D Prescription Drug Benefit Plans pursuant to the Medicare Modernization Act of 2003," Kilian added. "We plan to participate in 25% of the risk on all Part D policies sold by our agents. This prescription drug insurance program presents an important marketing opportunity for us, and we believe this partnership with Coventry, a national managed healthcare company with over $6.5 billion in revenue, is an ideal way for us to participate. We look forward to adding these plans to our senior product portfolio." 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 $4.2 million, including $0.4 million from net realized investment gains, compared to $5.1 million in the second quarter of 2004. Pre-tax income for the first six months was $7.5 million, including $0.5 million from net realized investment gains and $0.9 million from net unrealized investment losses related to trading securities. This compares to pre-tax income of $7.6 million for the same period of 2004. Benefits, claims, losses and settlement expenses in the Senior Segment were $40.0 million, compared to $33.6 million for the second quarter of 2004. The Senior Segment benefit and claims loss ratio was 78.7%, compared to 74.7% in the second quarter of 2004. The increase in the loss ratio was due primarily to an increase in the Medicare supplement loss ratio from 72.2% in the second quarter of 2004 to 77.4% in the second quarter of 2005, reflecting the adverse development of the March 31, 2005 claim reserves. For the six months, benefits, claims, losses and settlement expenses in the Senior Segment were $78.5 million, compared to $67.3 million for the first six months of 2004. The Senior Segment benefit and claims loss ratio was 77.8%, compared to 76.0% for the first six months of 2004. This increase was due to an increase in the Medicare supplement loss ratio from 70.7% in the first half of 2004 to 74.7% in the first half of 2005. The Medicare supplement loss ratio is expected to be lower in the second half of the year as the full impact of the 2005 rate increases on this business takes hold, and consistent with the historical seasonality of this product. The Medicare supplement loss ratio is now expected to be approximately 72.6% for the full year 2005, compared to 71.9% for 2004. "Our Senior Segment premiums continued to increase compared to last year due to new business and the implementation of our 2005 rate increases," Kilian said. "While we anticipated a challenging sales environment given our 2005 rate increases and a competitive senior market, new sales have still been below our expectations. Beginning in late 2004, we took steps to contend with the sales challenges we presently face and we continue to proactively address these challenges today. "In late June, we introduced new Medicare supplement products through our Provident American Life and Health Insurance Company (PALHIC) subsidiary," Kilian added. "We also developed a career distribution channel and have begun contracting distributors to focus specifically on marketing senior products. In addition, we rolled out and began selling new senior life insurance plans. We feel we have made significant strides in improving our portfolio of products for the senior market, and have built the infrastructure for improved sales results through the balance of the year." Medical Segment (catastrophic and comprehensive medical plans) Pre-tax income for the quarter was $3.4 million, including $0.2 million from net realized investment gains, compared to $3.0 million in the second quarter of 2004. Pre-tax income for the first six months of 2005 was $6.4 million including $0.1 million from net realized investment gains, compared to $7.5 million in 2004. Benefits, claims, losses and settlement expenses in the Medical Segment were $38.4 million, compared to $43.9 million in the second quarter of 2004. The Medical Segment benefit and claims loss ratio was 69.7%, compared to 70.0% for the second quarter of 2004. For the six months, benefits, claims, losses and settlement expenses in the Medical Segment were $77.3 million, compared to $86.7 million for the first six months of 2004. The Medical Segment benefit and claims loss ratio was 69.3%, compared to 67.8% for the first six months of 2004, due to the increased severity of large claims primarily in the first quarter. The loss ratio in the Medical Segment is expected to be higher in the balance of 2005 consistent with historical quarterly seasonality patterns. "Product development is also a major priority in our Medical Segment," Kilian said. "In early July, we launched a new series of major medical plans that were developed to offer consumers a variety of benefit levels to accommodate different budgets. We expect to begin seeing new sales of these higher margin products during the second half of the year. Sales of HSA-qualified plans continue to increase, and now represent approximately 74% of our new sales to small employer groups and 12% of our new sales to individuals, families and associations." Outlook Due to the higher-than-expected Medicare supplement loss ratio in the first half of the year and higher-than-expected claims severity in the Medical Segment, the company is adjusting its earnings guidance for the full year 2005. The company now expects net income per diluted share of $0.48 to $0.51 for the full year (including the $0.03 per share favorable impact of the reduction in federal income tax reserves) versus its prior estimate of $0.50 to $0.53 per diluted share. In the company's outlook for 2005, net income per diluted share excludes the impact of net realized and unrealized gains or losses. "We had expected our 2005 Medicare supplement rate increases to both adequately address anticipated medical inflation and to have a more positive impact on profitability in the first half of this year. Further, we had not expected some of the large claim experience that we have seen in our Medical Segment," Kilian said. "We are disappointed with the downward adjustment in our earnings guidance, and we intend to pursue additional cost reductions, as well as appropriate rate increases, to achieve improved profitability. "We remain committed to positioning Ceres for long-term results," Kilian added. "In both business segments we plan to continue to enhance our product portfolios, control our expenses and improve profitability and margins. Our focus remains on providing competitive products to select markets." A conference call with management regarding second quarter 2005 results is scheduled for 1:00 p.m. (Eastern) on August 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=1103396 . 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 Six Months Ended June 30, June 30, ------------------- ------------------- 2005 2004 2005 2004 --------- --------- --------- --------- REVENUES Premiums, net Medical $ 55,107 $ 62,665 $111,673 $127,892 Senior and other 50,801 44,914 100,871 88,516 -------- -------- -------- -------- Total premiums, net 105,908 107,579 212,544 216,408 Net investment income 6,798 6,686 12,881 12,949 Net realized/unrealized gains (losses) 736 130 (104) 238 Fee and other income 4,163 4,646 8,751 9,863 -------- -------- -------- -------- 117,605 119,041 234,072 239,458 -------- -------- -------- -------- BENEFITS, LOSSES AND EXPENSES Benefits, claims, losses and settlement expenses Medical 38,416 43,885 77,336 86,699 Senior and other 39,967 33,558 78,453 67,308 -------- -------- -------- -------- Total benefits, claims, losses and settlement expenses 78,383 77,443 155,789 154,007 Selling, general and administrative expenses 31,809 32,963 64,321 66,574 Net amortization and change in acquisition costs and value of business acquired 26 965 467 4,439 Interest expense and financing costs 180 166 355 338 -------- -------- -------- -------- 110,398 111,537 220,932 225,358 -------- -------- -------- -------- Income before federal income taxes 7,207 7,504 13,140 14,100 Federal income tax expense 2,535 2,612 3,619 3,034 -------- -------- -------- -------- Net income $ 4,672 $ 4,892 $ 9,521 $ 11,066 ======== ======== ======== ======== Net income per share Basic $ 0.14 $ 0.14 $ 0.28 $ 0.32 Diluted 0.13 0.14 0.27 0.31 Weighted average shares outstanding Basic 34,507 34,459 34,522 34,427 Diluted 34,805 35,276 34,682 35,162 CERES GROUP, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) June 30, December 31, 2005 2004 ------------- ------------- (Unaudited) ASSETS Investments $ 496,668 $ 494,951 Cash and cash equivalents 27,674 22,635 Reinsurance receivable 133,125 130,345 Deferred acquisition costs 67,930 67,074 Value of business acquired 9,782 10,952 Goodwill and licenses 14,097 14,097 Other assets 24,157 25,939 ------------ ------------ Total assets $ 773,433 $ 765,993 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Policy liabilities and benefits accrued $ 496,899 $ 489,829 Deferred reinsurance gain 5,746 6,562 Other policyholders' funds 16,812 19,016 Debt 9,188 10,750 Other liabilities 32,226 35,018 ------------ ------------ Total liabilities 560,871 561,175 Stockholders' equity 212,562 204,818 ------------ ------------ Total liabilities and stockholders' equity $ 773,433 $ 765,993 ============ ============ Equity per common share: After accumulated other comprehensive income (1) $ 6.14 $ 5.93 Before accumulated other comprehensive income (1) 5.95 5.72 Book value per share excluding goodwill and licenses 5.74 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 Six Months Ended June 30, June 30, ------------------- -------------------- 2005 2004 2005 2004 --------- --------- --------- ---------- Medical Revenues Net premiums $ 55,107 $ 62,665 $111,673 $ 127,892 Net investment income 890 1,248 1,861 2,494 Net realized/unrealized gains (losses) 203 (8) 122 26 Fee and other income 3,733 3,932 7,694 8,657 -------- -------- -------- --------- 59,933 67,837 121,350 139,069 -------- -------- -------- --------- Expenses Benefits and claims 38,416 43,885 77,336 86,699 Other operating expenses 18,152 20,970 37,567 44,821 -------- -------- -------- --------- 56,568 64,855 114,903 131,520 -------- -------- -------- --------- Segment profit before federal income taxes $ 3,365 $ 2,982 $ 6,447 $ 7,549 ======== ======== ======== ========= Senior and Other Revenues Net premiums $ 50,801 $ 44,914 $100,871 $ 88,516 Net investment income 5,856 5,438 10,968 10,455 Net realized/unrealized gains (losses) 418 27 (456) (9) Fee and other income 430 714 1,057 1,206 -------- -------- -------- --------- 57,505 51,093 112,440 100,168 -------- -------- -------- --------- Expenses Benefits and claims 39,967 33,558 78,453 67,308 Other operating expenses 13,306 12,463 26,473 25,259 -------- -------- -------- --------- 53,273 46,021 104,926 92,567 -------- -------- -------- --------- Segment profit before federal income taxes $ 4,232 $ 5,072 $ 7,514 $ 7,601 ======== ======== ======== ========= Corporate and Other Revenues Net investment income $ 52 $ - $ 52 $ - Net realized gains 115 111 230 221 -------- -------- -------- --------- 167 111 282 221 -------- -------- -------- --------- Expenses Interest expense and financing costs 180 166 355 338 Other operating expenses 377 495 748 933 -------- -------- -------- --------- 557 661 1,103 1,271 -------- -------- -------- --------- Segment loss before federal income taxes $ (390) $ (550) $ (821) $ (1,050) ======== ======== ======== ========= Income before federal income taxes $ 7,207 $ 7,504 $ 13,140 $ 14,100 ======== ======== ======== ========= Medical loss ratio 69.7% 70.0% 69.3% 67.8% Senior loss ratio 78.7% 74.7% 77.8% 76.0% Overall loss ratio 74.0% 72.0% 73.3% 71.2% *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 agents and 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, 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.