Ceres (NASDAQ:CERG)
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Ceres Group, Inc. (NASDAQ:CERG):
For the quarter:
-- Net income of $5.5 million ($0.17 per share)
-- Senior Segment pre-tax income of $5.7 million
-- Medical Segment pre-tax income of $3.2 million
Ceres Group, Inc. (NASDAQ:CERG) today reported net income of $5.5
million ($0.17 per share) for the first quarter of 2006, including
$0.1 million from net realized investment gains. This compares to net
income of $4.8 million ($0.14 per share) for the first quarter of
2005, including $0.5 million ($0.02 per share) from net realized
investment losses, and a $1.0 million ($0.03 per share) benefit
related to the reduction of federal income tax reserves associated
with the elimination of the company's untaxed policyholder surplus
account exposure.
"We are pleased with our strong first quarter results," said Tom
Kilian, president and chief executive officer of Ceres. "Both of our
segments had increased profits and overall new sales rose."
In addition, as announced on Monday, Ceres has entered into a
definitive merger agreement with Great American Financial Resources,
Inc. (GAFRI) (NYSE:GFR), whereby GAFRI will acquire all of the
outstanding shares of common stock of Ceres through a cash merger.
Under the terms of the merger agreement, GAFRI will pay $6.13 in cash
for each outstanding share of Ceres common stock, for a total equity
price of approximately $205 million on a fully diluted basis.
"We believe that Ceres and GAFRI are an excellent strategic fit,"
Kilian added. "This merger will produce a much larger senior market
presence and strengthened combined competitive position. We are
committed to working with GAFRI on a smooth transition."
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 $5.7 million. This compares to
pre-tax income of $3.3 million in the first quarter of 2005, including
$0.9 million from net realized investment losses.
Benefits, claims, losses and settlement expenses in the Senior
Segment were $41.4 million, compared to $38.5 million in the first
quarter of 2005. The Senior Segment benefit and claims loss ratio was
74.8%, compared to 76.9% in the first quarter of 2005. The improvement
in the Senior Segment loss ratio in the first quarter of 2006 was due
primarily to favorable long-term care experience partially offset by
an increase in the Medicare supplement loss ratio from 71.9% in the
first quarter of 2005 to 74.0% in the first quarter of 2006. The
Medicare supplement loss ratio is still expected to be approximately
72% for the full year 2006.
Based on current new sales trends and slightly
higher-than-expected lapse rates on the company's Medicare supplement
business related to the 2006 rate increases, Senior Segment premiums
are now expected to increase approximately 11% in 2006.
"While new sales in our Senior Segment were not as strong as we
had anticipated, we are pleased with the progress being made in our
new career division, Ceres Senior Benefits, LLC (CSB)," Kilian said.
"At the end of the first quarter, we had contracted 25 regional sales
managers and 334 agents at CSB, and our 2006 sales results have been
promising."
Medical Segment (catastrophic and comprehensive medical plans)
Pre-tax income for the quarter was $3.2 million. This compares to
pre-tax income of $3.1 million in the first quarter of 2005, including
$0.1 million from net realized investment losses.
Benefits, claims, losses and settlement expenses in the Medical
Segment were $40.1 million, compared to $38.9 million in the first
quarter of 2005. The Medical Segment benefit and claims loss ratio was
71.8%, compared to 68.8% in the first quarter of 2005. The first
quarter 2006 loss ratio was primarily impacted by a strengthening of
claim reserves and an increase in January in-patient hospital stays.
Due to seasonality, the Medical Segment loss ratio is expected to
increase through the balance of the year.
Due to continued increased new sales, Medical Segment premiums are
expected to increase approximately 5% in 2006.
"Sales in our Medical Segment rose significantly compared to the
same quarter last year, which resulted in improved expense coverage
for this segment in 2006," Kilian said. "Currently, we are rolling out
the new rates and additional benefit level options on our brokerage
Advantage Series, as well as offering these products through special
marketing relationships. We are pleased with the popularity of these
plans. They offer extensive options for customers and agents and are
expected to produce attractive profit margins."
Outlook
"We will continue to execute our core strategy of growth in our
Senior Segment and stability and targeted growth in our Medical
Segment," Kilian said. "In addition, we will work with the GAFRI
transition team to implement the merger transaction we announced on
Monday."
As previously announced, the company expects to achieve net income
in a range of $0.50 per diluted share for 2006, based on continued
growth in the company's Senior Segment, and stabilization of the
revenue decline and improved claims trends in the company's Medical
Segment. In the company's outlook for 2006, projected net income per
share excludes the impact of net realized investment gains or losses.
A conference call with management regarding first quarter 2006
results and the contemplated merger is scheduled for 10:00 a.m.
(Eastern) on Thursday, May 4, 2006. To listen to the live call over
the Internet, go to www.ceresgp.com or
http://phx.corporate-ir.net/playerlink.zhtml?c=71415&s=wm&e=1306704.
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.
-0-
*T
FINANCIAL TABLES TO FOLLOW
CERES GROUP, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(in thousands, except per share amounts)
Three Months Ended
March 31,
-------------------
2006 2005
--------- ---------
REVENUES
Premiums, net
Medical $ 55,827 $ 56,566
Senior and other 55,367 50,070
-------- --------
Total premiums, net 111,194 106,636
Net investment income 6,974 6,083
Net realized gains (losses) 109 (840)
Fee and other income 4,627 4,588
-------- --------
122,904 116,467
-------- --------
BENEFITS, LOSSES AND EXPENSES
Benefits, claims, losses and settlement expenses
Medical 40,058 38,920
Senior and other 41,419 38,486
-------- --------
Total benefits, claims, losses and
settlement expenses 81,477 77,406
Selling, general and administrative expenses 35,323 32,512
Net (deferral) amortization and change in
acquisition costs and value of business acquired (2,593) 441
Interest expense and financing costs 159 175
-------- --------
114,366 110,534
-------- --------
Income before federal income taxes 8,538 5,933
Federal income tax expense 2,996 1,084
-------- --------
Net income $ 5,542 $ 4,849
======== ========
Net income per share
Basic $ 0.17 $ 0.14
Diluted 0.17 0.14
Weighted average shares outstanding
Basic 33,239 34,536
Diluted 33,375 34,671
CERES GROUP, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
March 31, December 31,
2006 2005
------------ ------------
(Unaudited)
ASSETS
Investments $ 491,217 $ 488,906
Cash and cash equivalents 25,267 26,764
Reinsurance receivable 127,476 131,227
Deferred acquisition costs 77,803 73,955
Value of business acquired 10,752 11,126
Goodwill and licenses 14,097 14,097
Other assets 23,149 24,928
----------- -----------
Total assets $ 769,761 $ 771,003
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and benefits accrued $ 506,788 $ 508,023
Deferred reinsurance gain 5,147 5,451
Other policyholders' funds 15,856 14,970
Debt 6,250 7,313
Other liabilities 30,570 31,873
----------- -----------
Total liabilities 564,611 567,630
Stockholders' equity 205,150 203,373
----------- -----------
Total liabilities and stockholders'
equity $ 769,761 $ 771,003
=========== ===========
Equity per common share:
After accumulated other comprehensive
income (1) $ 6.17 $ 6.12
Before accumulated other comprehensive
income (1) 6.28 6.12
Book value per share excluding goodwill and
licenses 5.74 5.70
-------------
(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
March 31,
---------------------
2006 2005
---------- ----------
Medical
Revenues
Net premiums $ 55,827 $ 56,566
Net investment income 878 971
Net realized gains (losses) 3 (81)
Fee and other income 4,075 3,961
--------- ---------
60,783 61,417
--------- ---------
Expenses
Benefits and claims 40,058 38,920
Other operating expenses 17,500 19,415
--------- ---------
57,558 58,335
--------- ---------
Segment profit before federal income taxes $ 3,225 $ 3,082
========= =========
Senior and Other
Revenues
Net premiums $ 55,367 $ 50,070
Net investment income 6,025 5,112
Net realized losses (9) (874)
Fee and other income 552 627
--------- ---------
61,935 54,935
--------- ---------
Expenses
Benefits and claims 41,419 38,486
Other operating expenses 14,797 13,167
--------- ---------
56,216 51,653
--------- ---------
Segment profit before federal income taxes $ 5,719 $ 3,282
========= =========
Corporate and Other
Revenues
Net investment income $ 71 $ -
Net realized gains 115 115
--------- ---------
186 115
--------- ---------
Expenses
Interest expense and financing costs 159 175
Other operating expenses 433 371
--------- ---------
592 546
--------- ---------
Segment loss before federal income taxes $ (406) $ (431)
========= =========
Income before federal income taxes $ 8,538 $ 5,933
========= =========
Medical loss ratio 71.8% 68.8%
Senior loss ratio 74.8% 76.9%
Overall loss ratio 73.3% 72.6%
*T
In connection with Ceres' solicitation of proxies with respect to
the meeting of stockholders to be called with respect to the proposed
merger, Ceres will file with the Securities and Exchange Commission,
and will furnish to stockholders of Ceres, a proxy statement.
Stockholders are advised to read the proxy statement when it is
finalized and distributed to stockholders because it will contain
important information. Stockholders will be able to obtain a
free-of-charge copy of the proxy statement (when available) and other
relevant documents filed with the SEC from the SEC's website at
www.sec.gov. Stockholders will also be able to obtain a free-of-charge
copy of the proxy statement and other relevant documents (when
available) by directing a request by mail or telephone to Ceres Group,
Inc., 17800 Royalton Road, Cleveland, OH 44136, Attention: Corporate
Secretary, Telephone: 440-572-2400, or from Ceres' website,
www.ceresgp.com.
Ceres and certain of its directors, executive officers and other
members of management and employees may, under the rules of the SEC,
be deemed to be "participants" in the solicitation of proxies from
stockholders of Ceres in favor of the proposed merger. Information
regarding the persons who may be considered "participants" in the
solicitation of proxies will be set forth in Ceres' proxy statement
when it is filed with the SEC. Information regarding certain of these
persons and their beneficial ownership of Ceres' common stock as of
March 27, 2006 is also set forth in the Schedule 14A filed by Ceres on
April 3, 2006 with the SEC.
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. It also contains certain forward-looking statements
with respect to the effect of the proposed merger. 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. Although the company
believes that the expectations are based on reasonable assumptions, it
can give no assurance that its expectations will be achieved.
Forward-looking information is subject to certain risks, trends and
uncertainties that could cause actual results to differ materially
from those projected. Many factors could cause actual results to
differ materially from those contemplated by such forward-looking
statements, including, among others, failure to obtain stockholder
approval or the failure to satisfy other closing conditions, including
regulatory approval, with respect to the merger, expectations of the
company's operating plans and strategies in general, our expectations
of the performance of our lines of business, failure to accurately
predict loss ratios, persistency and improvements in our business,
business conditions and competition in the healthcare industry, the
failure to successfully implement our 2006 business plan (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, profitable 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, 2005, 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.