CERG Ceres (MM)

Ceres Group Reports Second Quarter 2004 Results CLEVELAND, Aug. 4 /PRNewswire-FirstCall/ -- For the quarter: -- Net operating income of $4.8 million ($0.14 per share) -- Net income of $4.9 million ($0.14 per share) -- Senior Segment pre-tax operating income of $5.0 million -- Medical Segment pre-tax operating income of $3.0 million For the six months: -- Net operating income of $9.0 million ($0.26 per share) -- Net income of $11.1 million ($0.31 per share) -- Senior Segment pre-tax operating income of $7.6 million -- Medical Segment pre-tax operating income of $7.5 million Ceres Group, Inc. (NASDAQ:CERG) today reported net operating income of $4.8 million ($0.14 per share), excluding $0.1 million from net realized investment gains for the second quarter of 2004. This compares to net operating income of $3.9 million ($0.11 per share) for the second quarter of 2003, excluding $0.4 million ($0.01 per share) from net realized investment gains and $2.7 million ($0.08 per share) related to a decrease in the valuation allowance for deferred taxes. Net income was $4.9 million ($0.14 per share) in the second quarter of 2004, compared to $6.9 million ($0.20 per share) for the second quarter of 2003. (Logo: http://www.newscom.com/cgi-bin/prnh/20000315/CRLOGO ) For the first six months of 2004, the company reported net operating income of $9.0 million ($0.26 per share), excluding $0.2 million from net realized investment gains and $1.9 million ($0.05 per share) related to a decrease in the valuation allowance for deferred taxes. This compares to net operating income of $7.3 million ($0.21 per share) for the first six months of 2003, excluding $0.7 million ($0.02 per share) from net realized investment gains, $2.7 million ($0.08 per share) related to a decrease in the valuation allowance for deferred taxes and income of $3.6 million ($0.11 per share) from the discontinued operations of Pyramid Life Insurance Company, a subsidiary that was sold on March 31, 2003. Net income was $11.1 million ($0.31 per share) in the first six months of 2004, compared to $14.3 million ($0.42 per share) for the first six months of 2003, including $3.6 million ($0.11 per share) from discontinued operations. "Our mid-year results are positive," said Tom Kilian, president and chief executive officer of Ceres. "Both of our business segments continued to be profitable, and overall new sales increased compared to the first quarter of this year as well as the second quarter and six-month period a year ago. As the year progresses, we remain focused on our balanced strategy of growing the Senior Segment and maximizing profitability in the Medical Segment." 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. Senior Segment (Medicare supplement, long-term care, dental, life insurance, and annuities) Pre-tax operating income for the quarter was $5.0 million, compared to $5.6 million in the second quarter of 2003. Pre-tax income for the quarter was $5.1 million, compared to $5.9 million in 2003. Pre-tax operating income for the first six months was $7.6 million, compared to $7.8 million for the first six months of 2003. Pre-tax income for the first six months was $7.6 million, compared to $8.4 million for the same period of 2003. Benefits, claims, losses and settlement expenses in the Senior Segment were $33.6 million, compared to $30.6 million for the second quarter of 2003. The Senior Segment benefit and claims loss ratio was 74.7%, compared to 72.2% in the second quarter of 2003. The increase in the loss ratio was due primarily to an increase in the Medicare supplement loss ratio, partially offset by improved long-term care experience. For the six months, benefits, claims, losses and settlement expenses in the Senior Segment were $67.3 million, compared to $64.4 million for the first six months of 2003. The Senior Segment benefit and claims loss ratio was 76.0%, compared to 75.5% for the first six months of 2003. Medicare supplement claims were higher than expected in the first half of the year, as well as compared to the same period a year ago. The Medicare supplement loss ratio is expected to be lower in the second half of the year due to a moderation of this higher claim trend as well as the historical seasonality of this product. "New sales in our Senior Segment continue to be promising, and should contribute to future premium growth," Kilian said. "Medicare supplement sales, the foundation of our senior business, rose compared to the first quarter and showed substantial growth from a year ago. To meet our objective of expanding this segment, we plan to continue strengthening relationships with our distribution partners and concentrating our efforts on competitive markets, as well as refining and enhancing our products." Medical Segment (catastrophic and comprehensive medical plans) Pre-tax operating income for the quarter was $3.0 million, compared to pre-tax operating income of $1.3 million in the second quarter of 2003. Pre- tax income for the quarter was $3.0 million, compared to $1.5 million in the second quarter of 2003. Pre-tax operating income for the six months was $7.5 million, compared to $5.1 million for the first six months of 2003. Pre- tax income for the first six months of 2004 was $7.5 million, compared to $5.4 million in 2003. Benefits, claims, losses and settlement expenses in the Medical Segment were $43.9 million, compared to $58.8 million in the second quarter of 2003. The Medical Segment benefit and claims loss ratio was 70.0%, compared to 74.4% for the second quarter of 2003. This improvement was due to lower health claims trends in 2004 and favorable run-off of prior quarter claim reserves. For the six months, benefits, claims, losses and settlement expenses in the Medical Segment were $86.7 million, compared to $121.3 million for the first six months of 2003. The Medical Segment benefit and claims loss ratio was 67.8%, compared to 73.9% for the first six months of 2003. This improvement was due to lower health claim trends in 2004 and favorable run-off of prior year claim reserves. The company expects that medical claims and the loss ratio will increase in the second half of the year as policyholders meet their annual required co-payments and deductibles. "Our Medical Segment results were strong for both the quarter and the six months," Kilian said. "This success was primarily driven by our niche marketing strategy which has proven effective. In addition, new sales increased significantly compared with the same period a year ago. The early sales results of our health savings account (HSA) qualified products are also encouraging. HSAs offer our customers an excellent opportunity to take more control of their healthcare dollars and save for future health expenses on a tax-free basis. Since these products have less first-dollar coverage, they are also a good risk-sharing plan for our company. We intend to continue refining our product portfolio and pricing, while targeting profitable states and working with our producers to remain competitive in this challenging market." Outlook "Our results so far this year confirm that our strategy is working," Kilian said. "We are confident in our ability to grow our Senior Segment while we carefully manage our Medical Segment to ensure ongoing profitability. Our goal remains to achieve a 50/50 revenue split between our business segments. We believe achieving this balance will help us produce stable and positive results for the long term." 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 half 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 second quarter 2004 results is scheduled for noon (Eastern) on Thursday, August 5, 2004. To listen to the live conference call over the Internet, go to http://www.ceresgp.com/ or http://phx.corporate-ir.net/playerlink.zhtml?c=71415&s=wm&e=920063 . 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 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, ------------------ ------------------ 2004 2003 2004 2003 -------- -------- -------- -------- REVENUES Premiums, net Medical $62,665 $79,042 $127,892 $164,161 Senior and other 44,914 42,402 88,516 85,259 -------- -------- -------- -------- Total premiums, net 107,579 121,444 216,408 249,420 Net investment income 6,686 6,460 12,949 11,984 Net realized gains 130 562 238 1,146 Fee and other income 4,294 7,396 9,102 13,738 Amortization of deferred reinsurance gain 352 419 761 1,076 -------- -------- -------- -------- 119,041 136,281 239,458 277,364 -------- -------- -------- -------- BENEFITS, LOSSES AND EXPENSES Benefits, claims, losses and settlement expenses Medical 43,885 58,799 86,699 121,305 Senior and other 33,558 30,604 67,308 64,404 -------- -------- -------- -------- Total benefits, claims, losses and settlement expenses 77,443 89,403 154,007 185,709 Selling, general and administrative expenses 32,963 37,218 66,574 75,388 Net amortization and change in acquisition costs and value of business acquired 965 2,656 4,439 3,057 Interest expense and financing costs 166 306 338 735 -------- -------- -------- -------- 111,537 129,583 225,358 264,889 -------- -------- -------- -------- Income from continuing operations before federal income taxes 7,504 6,698 14,100 12,475 Federal income tax expense (benefit) 2,612 (253) 3,034 1,767 -------- -------- -------- -------- Income from continuing operations 4,892 6,951 11,066 10,708 -------- -------- -------- -------- 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 $0 and $79, respectively) - (39) - (2,149) -------- -------- -------- -------- Income (loss) from discontinued operations - (39) - 3,583 -------- -------- -------- -------- Net income $4,892 $6,912 $11,066 $14,291 ======== ======== ======== ======== Basic earnings per share Continuing operations $0.14 $0.20 $0.32 $0.31 Discontinued operations - - - 0.11 -------- -------- ------- -------- Net income $0.14 $0.20 $0.32 $0.42 ======== ======== ======= ======== Diluted earnings per share Continuing operations $0.14 $0.20 $0.31 $0.31 Discontinued operations - - - 0.11 -------- -------- -------- -------- Net income $0.14 $0.20 $0.31 $0.42 ======== ======== ======== ======== Basic weighted average shares outstanding 34,459 34,297 34,427 34,267 Diluted weighted average shares outstanding 35,275 34,320 35,161 34,272 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 uses non-GAAP financial measures to evaluate the company's performance for the periods presented, and 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, may not be indicative of overall operating trends. These non-GAAP measures should not be considered an alternative to measurements required by GAAP. Ceres' calculation of these measures may differ from similar measures used by other companies and investors should be careful when comparing the company's non-GAAP financial measures to those of other companies. For the periods presented, net operating income, net operating income per share, and Medical and Senior Segment pre-tax operating income exclude the results of the discontinued operations of Pyramid Life Insurance Company (a subsidiary that was sold on March 31, 2003), realized gains on the sale of investments, and reductions to the valuation allowance for deferred taxes. The following is a reconciliation to the most directly comparable GAAP financial measure: Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2004 2003 2004 2003 -------- -------- -------- -------- NET OPERATING INCOME Net operating income $4,807 $3,895 $9,010 $7,272 Net realized gains 130 562 238 1,146 Income taxes on net realized gains (1) (45) (197) (83) (401) Reduction to the valuation allowance for deferred taxes -- 2,691 1,901 2,691 -------- -------- -------- -------- Income from continuing operations $4,892 $6,951 $11,066 $10,708 ======== ======== ======== ======== NET OPERATING INCOME PER SHARE DATA (DILUTED) Net operating income per share $0.14 $0.11 $0.26 $0.21 Net realized gains, net of tax (1) -- 0.01 -- 0.02 Reduction to the valuation allowance for deferred taxes -- 0.08 0.05 0.08 -------- -------- -------- -------- Net income per share from continuing operations $0.14 $0.20 $0.31 $0.31 ======== ======== ======== ======== SENIOR SEGMENT PRE-TAX OPERATING INCOME Senior Segment pre-tax operating income $5,045 $5,586 $7,610 $7,782 Net realized gains (losses) 27 285 (9) 584 -------- -------- -------- -------- Senior Segment profit before federal income taxes $5,072 $5,871 $7,601 $8,366 ======== ======== ======== ======== MEDICAL SEGMENT PRE-TAX OPERATING INCOME Medical Segment pre-tax operating income $2,990 $1,281 $7,523 $5,093 Net realized gains (losses) (8) 169 26 346 -------- -------- -------- -------- Medical Segment profit before federal income taxes $2,982 $1,450 $7,549 $5,439 ======== ======== ======== ======== (1) Taxes on net realized gains are based upon a 35% effective tax rate for all periods. CERES GROUP, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) June 30, December 31, 2004 2003 --------- --------- (Unaudited) ASSETS Investments $488,819 $484,280 Cash and cash equivalents 17,439 26,394 Reinsurance receivable 140,394 143,397 Deferred acquisition costs 66,815 69,609 Value of business acquired 12,638 13,034 Goodwill and licenses 14,097 14,097 Other assets 22,509 23,103 --------- --------- Total assets $762,711 $773,914 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Policy liabilities and benefits accrued $497,758 $504,493 Deferred reinsurance gain 8,695 9,456 Other policyholders' funds 19,605 20,821 Debt 11,875 13,000 Other liabilities 33,130 41,005 --------- --------- Total liabilities 571,063 588,775 Stockholders' equity 191,648 185,139 --------- --------- Total liabilities and stockholders' equity $762,711 $773,914 ========= ========= Equity per common share: After accumulated other comprehensive income (1) $5.56 $5.38 Before accumulated other comprehensive income (1) 5.49 5.17 Book value per share excluding goodwill and licenses 5.15 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 Six Months Ended June 30, June 30, ------------------ ------------------ 2004 2003 2004 2003 -------- -------- -------- -------- MEDICAL Revenues Net premiums $62,665 $79,042 $127,892 $164,161 Net investment income 1,248 1,458 2,494 2,933 Net realized gains (losses) (8) 169 26 346 Other income 3,932 5,531 8,657 12,022 -------- -------- -------- -------- 67,837 86,200 139,069 179,462 -------- -------- -------- -------- Expenses Benefits and claims 43,885 58,799 86,699 121,305 Other operating expenses 20,970 25,951 44,821 52,718 -------- -------- -------- -------- 64,855 84,750 131,520 174,023 -------- -------- -------- -------- Segment profit before federal income taxes $2,982 $1,450 $7,549 $5,439 ======== ======== ======== ======== SENIOR AND OTHER Revenues Net premiums $44,914 $42,402 $88,516 $85,259 Net investment income 5,438 5,011 10,455 9,051 Net realized gains (losses) 27 285 (9) 584 Other income 714 2,284 1,206 2,792 -------- -------- -------- -------- 51,093 49,982 100,168 97,686 -------- -------- -------- -------- Expenses Benefits and claims 33,558 30,604 67,308 64,404 Other operating expenses 12,463 13,507 25,259 24,916 -------- -------- -------- -------- 46,021 44,111 92,567 89,320 -------- -------- -------- -------- Segment profit before federal income taxes $5,072 $5,871 $7,601 $8,366 ======== ======== ======== ======== CORPORATE AND OTHER Revenues Net investment income $- $(9) $- $- Net realized gains 111 108 221 216 -------- -------- -------- -------- 111 99 221 216 -------- -------- -------- -------- Expenses Interest expense and financing costs 166 306 338 735 Other operating expenses 495 416 933 811 -------- -------- -------- -------- 661 722 1,271 1,546 -------- -------- -------- -------- Segment loss before federal income taxes $(550) $(623) $(1,050) $(1,330) ======== ======== ======== ======== Income from continuing operations before federal income taxes $7,504 $6,698 $14,100 $12,475 ======== ======== ======== ======== Medical loss ratio 70.0% 74.4% 67.8% 73.9% Senior loss ratio 74.7% 72.2% 76.0% 75.5% Overall loss ratio 72.0% 73.6% 71.2% 74.5% 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 its electronic distribution system. Ceres is included in the Russell 3000(R) Index. 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, 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), adverse outcomes in litigation, 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, Inc. 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, Inc. Web site: http://www.ceresgp.com/ http://phx.corporate-ir.net/playerlink.zhtml?c=71415&s=wm&e=920063

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