Ceres (NASDAQ:CERG)
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Ceres Group, Inc. (NASDAQ:CERG):
For the quarter:
-- Net income of $2.1 million ($0.06 per share)
-- Senior Segment pre-tax income of $6.9 million
-- Medical Segment pre-tax loss of $3.3 million
For the full year 2005:
-- Net income of $15.0 million ($0.44 per share)
-- Senior Segment pre-tax income of $17.9 million
-- Medical Segment pre-tax income of $4.1 million
Ceres Group, Inc. (NASDAQ:CERG) today reported net income of $2.1
million ($0.06 per share), for the fourth quarter of 2005. This
compares to net income of $2.6 million ($0.08 per share) for the
fourth quarter of 2004.
For the full year of 2005, the company reported net income of
$15.0 million ($0.44 per share), including $0.5 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 $19.1 million ($0.55
per share) for 2004, including $0.8 million ($0.02 per share) from net
realized investment gains, a $2.0 million ($0.06 per share) charge
from the California litigation settlements, net of tax, and a $5.0
million ($0.14 per share) benefit related to a decrease in the
valuation allowance for deferred taxes.
"We finished 2005 with profits in both of our business segments
and increased overall new sales," said Tom Kilian, president and chief
executive officer of Ceres. "In 2005, we sharpened our focus on
marketing with several enhancements that drove increased new sales,
and which we anticipate will continue to drive new sales in both of
our business segments. Most importantly, the financial position of our
company remains strong as evidenced by our book value (equity per
common share before accumulated other comprehensive income) which rose
7% for 2005 to $6.12. In addition, we completed a $10 million buyback
of our stock.
"In 2005, we also faced challenges in both our segments," Kilian
said. "Results in our Senior Segment were impacted by a
higher-than-anticipated Medicare supplement loss ratio. Our Medical
Segment was affected by increased severity of larger dollar claims. In
2006, we continue to actively address these issues as we remain
focused on our ongoing business strategy of growth in our Senior
Segment and stability in our Medical Segment."
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 $6.9 million, compared to $5.1
million in the fourth quarter of 2004, including $0.6 million from net
realized investment gains. Pre-tax income for the full year was $17.9
million, including $0.1 million from net realized investment gains.
This compares to pre-tax income of $18.5 million for the same period
of 2004, including $0.7 million from net realized investment gains.
Benefits, claims, losses and settlement expenses in the Senior
Segment were $42.7 million, compared to $36.7 million for the fourth
quarter of 2004. The Senior Segment benefit and claims loss ratio was
78.7%, compared to 75.6% in the fourth quarter of 2004. The Medicare
supplement loss ratio was 70.6% for the fourth quarter of 2005,
compared to 70.9% for the fourth quarter of 2004. The fourth quarter
2005 overall loss ratio was negatively impacted by a $0.7 million
increase in the long-term care benefit reserves related to revisions
to our long-term care model. The revised model also resulted in a $1.1
million reduction in deferred acquisition cost amortization which
benefited fourth quarter results. The long-term care model was
adjusted in 2005 to reflect higher premium rate levels and
persistency. The Senior Segment results were also positively impacted
in the fourth quarter by $0.6 million related to a slowdown in
deferred acquisition cost amortization on our universal life block of
business due to improving mortality and a corresponding increase in
expected future gross profits.
For the full year, benefits, claims, losses and settlement
expenses in the Senior Segment were $162.7 million, compared to $138.5
million for 2004. The Senior Segment benefit and claims loss ratio was
78.7%, compared to 75.6% for 2004. The increase was primarily due to
an increase in the Medicare supplement loss ratio from 71.9% in 2004
to 73.8% in 2005, as well as unfavorable long-term care experience in
the third quarter of 2005.
"Our Senior Segment premiums rose 13%, or $23.6 million, for the
year compared to 2004 due to new business and 2005 rate increases,"
Kilian said. "To improve our results going forward, we believe that we
implemented the necessary rate increases on our Medicare supplement
blocks of business as we continue to focus on actuarial analysis and
pricing. As we proactively face these challenges, we remain confident
that our Medicare supplement plans will be a positive market for us in
the future."
"During 2005, we made significant strides in our Senior Segment
marketing," Kilian added. "While we are encouraged with this progress,
we faced a challenging sales environment resulting from increased
competition in the senior market, as well as our 2005 rate increases.
Mid-year we introduced new Medicare supplement products through our
Provident American Life and Health Insurance Company (PALHIC)
subsidiary and formed a new career distribution channel, Ceres Senior
Benefits, LLC (CSB). Agents give CSB a right of first refusal on all
senior business. At December 31, 2005, this agency had contracted 23
regional sales managers and 256 agents. In addition, we developed and
launched a new senior life insurance product portfolio. Finally, we
began marketing Medicare Part D prescription plans through our
relationship with Coventry Health Care, Inc., and as of January 31,
2006 we had approximately 10,000 insureds enrolled in these plans. We
believe that offering Medicare Part D plans brings increased sales
opportunities for our agents. We are excited about these key
initiatives which have built the infrastructure for improved sales in
this segment in 2006."
Medical Segment (catastrophic and comprehensive medical plans)
The Company reported a pre-tax loss for the quarter of $3.3
million, compared to a pre-tax loss of $0.6 million in the fourth
quarter of 2004, including $0.1 million from net realized investment
gains. Pre-tax income for the full year was $4.1 million, including
$0.2 million from net realized investment gains. This compares to
pre-tax income of $5.2 million in 2004, including $0.1 million from
net realized investment gains and a $3.1 million pre-tax charge from
the California litigation settlements.
Benefits, claims, losses and settlement expenses in the Medical
Segment were $45.8 million, compared to $45.0 million in the fourth
quarter of 2004. The Medical Segment benefit and claims loss ratio was
83.1%, compared to 76.2% for the fourth quarter of 2004. The loss
ratio was impacted by adverse development of third quarter reserve
levels, increased claim frequency and higher-than-expected levels of
seasonality in the fourth quarter.
For the full year, benefits, claims, losses and settlement
expenses in the Medical Segment were $162.2 million, compared to
$176.1 million for 2004. The Medical Segment benefit and claims loss
ratio was 73.4%, compared to 71.3% for 2004. The loss ratio was
impacted by increased large claim severity and unfavorable experience
in our partially self-funded small group (Partnership) plan.
"We were encouraged that the premiums in the Medical Segment
increased from the third to the fourth quarter, ending a long trend,"
Kilian said. "In addition, we were pleased with the sales results that
rose substantially compared to last quarter, the same period last year
as well as overall for the year. We attribute this sales success
largely to the Advantage Series of major medical products introduced
in mid-2005. These plans, which offer customers a wide choice of
benefit levels and prices, have been well received by our agents and
by consumers. The Advantage Series is built on a new rate manual that
allows for pricing consistency for all our individual/association
products and distribution channels."
Outlook
"In 2006 we will continue to manage both of our business segments
for improved results," Kilian said. "Our 2005 strategic initiatives
included product development, increased new sales, actuarial and
pricing analysis, and providing exceptional services to our agents and
customers. Our 2006 objectives are increased new sales, expense
reductions, actuarial analysis on our medical business and continuing
to provide exceptional service."
The company expects to achieve net operating income of $0.50 per
diluted share for the full year of 2006, based on an improvement in
the Medicare supplement loss ratio in the company's Senior Segment,
and level claims trends and increased new sales 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
and losses.
"We believe we have put in place an aggressive but achievable plan
to reach our goals this year," Kilian said. "As an integral part of
this, we will continue to sharpen our marketing focus in each of our
business segments."
The company expects Senior Segment premium revenues to increase by
approximately 15% in 2006. The overall Senior Segment loss ratio is
expected to decrease to approximately 76% in 2006 compared to 78.7%
for 2005. The Medicare supplement loss ratio is expected to decrease
to approximately 72% for the full year 2006 compared to 73.8% for 2005
due to the approval and implementation of overall rate increases that
averaged 15% on this block.
"This year we plan to grow our CSB distribution channel with a
goal of 50 regional sales managers and 1,000 agents by year end,"
Kilian said. "We believe that this distribution channel brings
increased stability in a highly-competitive market. Medicare
supplement will continue to be our lead product and we will be
expanding our offerings through all three of our insurance
subsidiaries. We will continue to aggressively monitor our Medicare
supplement business in 2006 to determine the impact of the rate
increases and competition. We also plan to increase cross-selling and
combination sales opportunities including senior life, annuities and
supplemental products. In addition, we will continue to promote sales
of Medicare Part D prescription plans as an important component of our
senior portfolio."
The company expects Medical Segment premium revenues to increase
in 2006 by approximately 5%, the first annual increase in premiums
since 2001, due to increased new sales in selected markets. The
overall Medical Segment loss ratio is expected to remain consistent
with 2005.
"Product development remains an initiative in our Medical
Segment," Kilian added. "During the year we plan to continue to
enhance our individual/association plans as well as review our small
employer group products. We plan to explore new marketing
relationships with national marketing companies and promote increased
brokerage sales through electronic distribution and traditional
sales."
"Finally, in both of our segments we remain committed to providing
'World Class Sales Support' to agents," Kilian said. "Over the past
two years we have made significant enhancements to our marketing
platform, which we believe will fuel future growth in our selected
niche markets."
"In closing, we are extremely enthusiastic about all of our
strategic plans," Kilian said. "We remain committed to our long-term
strategy. Simply stated, we believe that our core objectives position
us well for positive results going forward."
A conference call with management regarding fourth quarter and
2005 results is scheduled for 10:00 a.m. (Eastern) on Thursday, March
2, 2006. 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=1214239 .
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
CERES GROUP, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(in thousands, except per share amounts)
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------- -------------------
2005 2004 2005 2004
--------- --------- --------- ---------
REVENUES
Premiums, net
Medical $ 55,113 $ 59,013 $221,030 $247,002
Senior and other 54,289 48,522 206,822 183,220
-------- -------- -------- --------
Total premiums, net 109,402 107,535 427,852 430,222
Net investment income 7,274 6,181 26,908 25,415
Net realized gains 56 823 702 1,224
Fee and other income 4,355 4,800 17,076 19,463
-------- -------- -------- --------
121,087 119,339 472,538 476,324
-------- -------- -------- --------
BENEFITS, LOSSES AND EXPENSES
Benefits, claims, losses and
settlement expenses
Medical 45,817 44,976 162,248 176,143
Senior and other 42,708 36,688 162,735 138,490
-------- -------- -------- --------
Total benefits,
claims, losses and
settlement expenses 88,525 81,664 324,983 314,633
Selling, general and
administrative expenses 34,011 33,461 131,624 134,563
Net (deferral) amortization
and change in acquisition
costs and value of business
acquired (4,854) (55) (5,174) 4,571
Interest expense and
financing costs 173 177 706 684
-------- -------- -------- --------
117,855 115,247 452,139 454,451
-------- -------- -------- --------
Income before federal income
taxes 3,232 4,092 20,399 21,873
Federal income tax expense 1,136 1,451 5,352 2,756
-------- -------- -------- --------
Net income $ 2,096 $ 2,641 $ 15,047 $ 19,117
======== ======== ======== ========
Net income per share
Basic $ 0.06 $ 0.08 $ 0.44 $ 0.55
Diluted 0.06 0.08 0.44 0.55
Weighted average shares
outstanding
Basic 33,220 34,518 34,114 34,467
Diluted 33,353 34,653 34,303 34,904
CERES GROUP, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
December 31, December 31,
2005 2004
------------ ------------
ASSETS
Investments $ 488,906 $ 494,951
Cash and cash equivalents 26,764 22,635
Reinsurance receivable 131,227 130,345
Deferred acquisition costs 73,955 67,074
Value of business acquired 11,126 10,952
Goodwill and licenses 14,097 14,097
Other assets 24,928 25,939
----------- -----------
Total assets $ 771,003 $ 765,993
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and benefits accrued $ 508,023 $ 489,829
Deferred reinsurance gain 5,451 6,562
Other policyholders' funds 14,970 19,016
Debt 7,313 10,750
Other liabilities 31,873 35,018
----------- -----------
Total liabilities 567,630 561,175
Stockholders' equity 203,373 204,818
----------- -----------
Total liabilities and stockholders' equity $ 771,003 $ 765,993
=========== ===========
Equity per common share:
After accumulated other comprehensive
income (1) $ 6.12 $ 5.93
Before accumulated other comprehensive
income (1) 6.12 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 Twelve Months Ended
December 31, December 31,
------------------- -------------------
2005 2004 2005 2004
---------- -------- --------- ---------
Medical
Revenues
Net premiums $55,113 $59,013 $221,030 $247,002
Net investment income 968 810 3,571 4,268
Net realized gains
(losses) (11) 68 193 88
Fee and other income 3,691 3,958 14,862 16,851
------- ------- -------- --------
59,761 63,849 239,656 268,209
------- ------- -------- --------
Expenses
Benefits and claims 45,817 44,976 162,248 176,143
Other operating
expenses 17,227 19,474 73,333 86,888
------- ------- -------- --------
63,044 64,450 235,581 263,031
------- ------- -------- --------
Segment profit (loss)
before federal income
taxes $(3,283) $ (601) $ 4,075 $ 5,178
======= ======= ======== ========
Senior and Other
Revenues
Net premiums $54,289 $48,522 $206,822 $183,220
Net investment income 6,304 5,371 23,215 21,143
Net realized gains
(losses) (48) 641 56 688
Fee and other income 664 842 2,214 2,612
------- ------- -------- --------
61,209 55,376 232,307 207,663
------- ------- -------- --------
Expenses
Benefits and claims 42,708 36,688 162,735 138,490
Other operating
expenses 11,635 13,593 51,721 50,689
------- ------- -------- --------
54,343 50,281 214,456 189,179
------- ------- -------- --------
Segment profit before
federal income taxes $ 6,866 $ 5,095 $ 17,851 $ 18,484
======= ======= ======== ========
Corporate and Other
Revenues
Net investment income $ 2 $ - $ 122 $ 4
Net realized gains 115 114 453 448
------- ------- -------- --------
117 114 575 452
------- ------- -------- --------
Expenses
Interest expense and
financing costs 173 177 706 684
Other operating
expenses 295 339 1,396 1,557
------- ------- -------- --------
468 516 2,102 2,241
------- ------- -------- --------
Segment loss before
federal income taxes $ (351) $ (402) $ (1,527) $ (1,789)
======= ======= ======== ========
Income before federal income
taxes $ 3,232 $ 4,092 $ 20,399 $ 21,873
======= ======= ======== ========
Medical loss ratio 83.1% 76.2% 73.4% 71.3%
Senior loss ratio 78.7% 75.6% 78.7% 75.6%
Overall loss ratio 80.9% 75.9% 76.0% 73.1%
*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. 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, 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, 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.