Ceres (NASDAQ:CERG)
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Ceres Group, Inc. (NASDAQ:CERG):
For the quarter:
-- Net income of $3.4 million ($0.10 per share)
-- Senior Segment pre-tax income of $3.5 million
-- Medical Segment pre-tax income of $0.9 million
For the nine months:
-- Net income of $13.0 million ($0.37 per share)
-- Senior Segment pre-tax income of $11.0 million
-- Medical Segment pre-tax income of $7.4 million
Ceres Group, Inc. (NASDAQ:CERG) today reported net income of
$3.4 million ($0.10 per share), for the third quarter of 2005,
including $0.5 million ($0.01 per share) from net realized investment
gains and a $0.8 million ($0.02 per share) federal income tax benefit
related to the reduction of federal income tax reserves with respect
to recently closed tax years. This compares to net income of
$5.4 million ($0.16 per share) for the third quarter of 2004,
including $0.1 million from net realized investment gains, a
$2.1 million ($0.06 per share) charge from the California litigation
settlements, and a $3.0 million ($0.09 per share) benefit related to a
decrease in the valuation allowance for deferred taxes.
For the first nine months of 2005, the company reported net income
of $13.0 million ($0.37 per share), including $0.4 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 $16.5 million ($0.47
per share) for the first nine months of 2004, including $0.3 million
from net realized investment gains ($0.01 per share), a $2.1 million
($0.06 per share) charge from the California litigation settlements,
and a $5.0 million ($0.14 per share) benefit related to the decrease
in the valuation allowance for deferred taxes.
"In the third quarter, we are pleased that our business segments
remained profitable and new sales increased in both segments," said
Tom Kilian, president and chief executive officer of Ceres. "At the
same time, we faced challenges due to unfavorable experience in our
long-term care business as well as a higher-than-expected Medicare
supplement loss ratio. As we continue to address our Medicare
supplement loss ratio, we still believe that this business will
provide earnings growth in the long term.
"With our increased new sales in the third quarter, we are
beginning to see results from the investments we made in marketing
this year," Kilian said. "We attribute our sales improvements to the
products we introduced earlier this year and to our new career
distribution channel.
"We are also pleased to announce that we have completed the
$10 million buyback of our stock that we first announced in May of
this year," Kilian added. "We believe that these repurchases were an
attractive investment for us and reflect our ongoing confidence in the
company."
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 $3.5 million, including
$0.6 million from net realized investment gains, compared to
$5.8 million in the third quarter of 2004, including $0.1 million from
net realized investment gains. Pre-tax income for the first nine
months was $11.0 million, including $0.1 million from net realized
investment gains. This compares to pre-tax income of $13.4 million for
the same period of 2004.
Benefits, claims, losses and settlement expenses in the Senior
Segment were $41.6 million, compared to $34.5 million for the third
quarter of 2004. The Senior Segment benefit and claims loss ratio was
80.5%, compared to 74.7% in the third quarter of 2004. The increase in
the loss ratio was due primarily to unfavorable long-term care
experience in the third quarter of 2005, compared to favorable
experience and development of long-term care reserves in the third
quarter of 2004. The Medicare supplement loss ratio was higher than
expected for the third quarter of 2005 at 75.5%, due to adverse
development in the June 30, 2005 claim reserves, compared to 75.2% for
the third quarter of 2004.
For the nine months, benefits, claims, losses and settlement
expenses in the Senior Segment were $120.0 million, compared to
$101.8 million for the first nine months of 2004. The Senior Segment
benefit and claims loss ratio was 78.7%, compared to 75.6% for the
first nine months of 2004. This increase was due primarily to an
increase in the Medicare supplement loss ratio from 72.3% in the first
nine months of 2004 to 75.0% in the first nine months of 2005, as well
as unfavorable long-term care experience in the third quarter of 2005.
The Medicare supplement loss ratio is expected to be 71.1% in the
fourth quarter consistent with the historical seasonality of this
product. For the full year 2005, the Medicare supplement loss ratio is
now expected to be approximately 74.0%, compared to 71.9% for 2004.
"Premiums in our Senior Segment rose 12%, or $5.5 million,
compared to the third quarter of 2004," Kilian said. "We are
encouraged by this increase which is a result of both new business and
2005 rate increases.
"Although the Medicare supplement market remains competitive,
sales of our Medicare supplement plans increased compared to last
quarter and the same quarter a year ago," Kilian added. "We are also
pleased with the early results of our new career distribution channel.
Currently, we have appointed 18 regional sales managers and
approximately 180 agents to focus specifically on marketing our senior
product portfolio.
"We have begun marketing Medicare Part D prescription drug plans
through our relationship with Coventry Health Care, Inc. and its
affiliates," Kilian continued. "Introductory mailings have been sent
to approximately 130,000 existing senior insureds. Part D plans
enhance our senior portfolio and present increased cross-selling
opportunities for agents."
Medical Segment (catastrophic and comprehensive medical plans)
Pre-tax income for the quarter was $0.9 million, including
$0.1 million from net realized investment gains, compared to a pre-tax
loss of $1.8 million in the third quarter of 2004, including a
$3.3 million pre-tax charge from the California litigation
settlements. Pre-tax income for the first nine months of 2005 was
$7.4 million, including $0.2 million from net realized investment
gains. This compares to $5.8 million in the first nine months of 2004,
including the California litigation settlements.
Benefits, claims, losses and settlement expenses in the Medical
Segment were $39.1 million, compared to $44.5 million in the third
quarter of 2004. The Medical Segment benefit and claims loss ratio was
72.1%, compared to 74.0% for the third quarter of 2004. The increased
severity of large claims in the quarter was more than offset by
favorable reserve development.
For the nine months, benefits, claims, losses and settlement
expenses in the Medical Segment were $116.4 million, compared to
$131.2 million for the first nine months of 2004. The Medical Segment
benefit and claims loss ratio was 70.2%, compared to 69.8% for the
first nine months of 2004. The loss ratio in the Medical Segment is
expected to be higher in the fourth quarter of 2005 consistent with
historical seasonality patterns.
"Our Medical Segment sales were also positive this quarter,"
Kilian said. "We have introduced our new Advantage Series of major
medical products designed to offer customers a choice of benefit
levels and prices. These higher margin products have been well
received by our agents, as evidenced by our initial sales results."
Outlook
Due to the higher-than-expected Medicare supplement loss ratio
during the first nine months of the year and the unfavorable long-term
care experience in the third quarter, the company is adjusting its
earnings guidance for the full year 2005. The company now expects net
income per diluted share of $0.42 to $0.45 for the full year
(including the $0.05 per share federal income tax benefit related to
the reduction of the federal income tax reserves associated with the
elimination of the company's untaxed policyholder surplus account
exposure and recently closed tax years) versus its prior estimate of
$0.48 to $0.51 per diluted share. In the company's outlook for 2005,
net income per diluted share excludes the impact of net realized gains
or losses.
"Our Medicare supplement loss ratio continues to adversely impact
our earnings performance," Kilian said. "We are taking steps to
address this, including filing for appropriate 2006 rate increases on
this business.
"In addition to ongoing actuarial analysis and pricing adjustments
in both segments, we are pursuing cost reductions as well as product
development. All of these strategic initiatives are focused on
improving our profitability and margins. In spite of the challenges we
faced this year, we remain confident in our plan to position the
company for the long-term."
A conference call with management regarding third quarter 2005
results is scheduled for 10:00 a.m. (Eastern) on November 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=1153092.
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 Nine Months Ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
--------- --------- --------- ---------
REVENUES
Premiums, net
Medical $ 54,244 $ 60,097 $165,917 $187,989
Senior and other 51,662 46,182 152,533 134,698
-------- -------- -------- --------
Total premiums, net 105,906 106,279 318,450 322,687
Net investment income 6,753 6,285 19,634 19,234
Net realized gains 750 163 646 401
Fee and other income 3,970 4,800 12,721 14,663
-------- -------- -------- --------
117,379 117,527 351,451 356,985
-------- -------- -------- --------
BENEFITS, LOSSES AND EXPENSES
Benefits, claims, losses and
settlement expenses
Medical 39,095 44,468 116,431 131,167
Senior and other 41,574 34,494 120,027 101,802
-------- -------- -------- --------
Total benefits, claims,
losses and settlement
expenses 80,669 78,962 236,458 232,969
Selling, general and
administrative expenses 33,292 34,528 97,613 101,102
Net (deferral) amortization
and change in acquisition
costs and value of business
acquired (787) 187 (320) 4,626
Interest expense and financing
costs 178 169 533 507
-------- -------- -------- --------
113,352 113,846 334,284 339,204
-------- -------- -------- --------
Income before federal income
taxes 4,027 3,681 17,167 17,781
Federal income tax expense
(benefit) 597 (1,729) 4,216 1,305
-------- -------- -------- --------
Net income $ 3,430 $ 5,410 $ 12,951 $ 16,476
======== ======== ======== ========
Net income per share
Basic $ 0.10 $ 0.16 $ 0.38 $ 0.48
Diluted 0.10 0.16 0.37 0.47
Weighted average shares
outstanding
Basic 34,206 34,495 34,415 34,450
Diluted 34,377 34,755 34,654 35,025
CERES GROUP, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
September 30, December 31,
2005 2004
------------- ------------
(Unaudited)
ASSETS
Investments $ 469,799 $ 494,951
Cash and cash equivalents 46,753 22,635
Reinsurance receivable 134,232 130,345
Deferred acquisition costs 69,797 67,074
Value of business acquired 9,869 10,952
Goodwill and licenses 14,097 14,097
Other assets 20,818 25,939
------------ -----------
Total assets $ 765,365 $ 765,993
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities and benefits accrued $ 504,256 $ 489,829
Deferred reinsurance gain 5,620 6,562
Other policyholders' funds 14,686 19,016
Debt 8,250 10,750
Other liabilities 29,065 35,018
------------ -----------
Total liabilities 561,877 561,175
Stockholders' equity 203,488 204,818
------------ -----------
Total liabilities and stockholders'
equity $ 765,365 $ 765,993
============ ===========
Equity per common share:
After accumulated other comprehensive
income (1) $ 6.12 $ 5.93
Before accumulated other comprehensive
income (1) 6.06 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 Nine Months Ended
September 30, September 30,
------------------- -------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Medical
Revenues
Net premiums $ 54,244 $ 60,097 $165,917 $187,989
Net investment income 742 964 2,603 3,458
Net realized gains (losses) 82 (6) 204 20
Fee and other income 3,477 4,236 11,171 12,893
-------- -------- -------- --------
58,545 65,291 179,895 204,360
-------- -------- -------- --------
Expenses
Benefits and claims 39,095 44,468 116,431 131,167
Other operating expenses 18,539 22,593 56,106 67,414
-------- -------- -------- --------
57,634 67,061 172,537 198,581
-------- -------- -------- --------
Segment profit (loss) before
federal income taxes $ 911 $ (1,770) $ 7,358 $ 5,779
======== ======== ======== ========
Senior and Other
Revenues
Net premiums $ 51,662 $ 46,182 $152,533 $134,698
Net investment income 5,943 5,317 16,911 15,772
Net realized gains 560 56 104 47
Fee and other income 493 564 1,550 1,770
-------- -------- -------- --------
58,658 52,119 171,098 152,287
-------- -------- -------- --------
Expenses
Benefits and claims 41,574 34,494 120,027 101,802
Other operating expenses 13,613 11,837 40,086 37,096
-------- -------- -------- --------
55,187 46,331 160,113 138,898
-------- -------- -------- --------
Segment profit before federal
income taxes $ 3,471 $ 5,788 $ 10,985 $ 13,389
======== ======== ======== ========
Corporate and Other
Revenues
Net investment income $ 68 $ 4 $ 120 $ 4
Net realized gains 108 113 338 334
-------- -------- -------- --------
176 117 458 338
-------- -------- -------- --------
Expenses
Interest expense and
financing costs 178 169 533 507
Other operating expenses 353 285 1,101 1,218
-------- -------- -------- --------
531 454 1,634 1,725
-------- -------- -------- --------
Segment loss before federal
income taxes $ (355) $ (337) $ (1,176) $ (1,387)
======== ======== ======== ========
Income before federal income
taxes $ 4,027 $ 3,681 $ 17,167 $ 17,781
======== ======== ======== ========
Medical loss ratio 72.1% 74.0% 70.2% 69.8%
Senior loss ratio 80.5% 74.7% 78.7% 75.6%
Overall loss ratio 76.2% 74.3% 74.3% 72.2%
*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 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. Many factors
could cause actual results to differ materially from those
contemplated by such forward-looking statements, including, among
others, failure to accurately predict loss ratios and improvements in
our business, 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.