Ceres (NASDAQ:CERG)
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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
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*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.