8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Date of Report (date of earliest event reported): November 2, 2005

CERES GROUP, INC.

(Exact Name of Registrant as Specified in Charter)

Delaware
(State or Other Jurisdiction
of Incorporation) 0-8483
(Commission
File Number) 34-1017531
(I.R.S. Employer
Identification Number)

17800 Royalton Road, Cleveland, Ohio 44136
(Address of principal executive offices)

(440) 572-2400
(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02.   Results of Operations and Financial Condition.

     On November 2, 2005, Ceres Group, Inc. issued a press release reporting earnings for the third quarter of 2005. A copy of the press release is attached hereto as Exhibit 99.1.

Item 9.01.   Exhibits.

Exhibit 99.1 Press Release, dated November 2, 2005, reporting earnings for the third quarter of 2005.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

CERES GROUP, INC.
 

/s/ Kathleen L. Mesel  

By: Kathleen L. Mesel 

Its: Corporate Secretary 

Dated: November 3, 2005

EX-99.1

Exhibit 99.1

FOR FURTHER INFORMATION:
David I. Vickers, Chief Financial Officer
(440) 878-2941

Gayle V. Bentkowski, Senior Vice President
(440) 572-8848

Ceres Group Reports Third Quarter 2005 Results
And Updates 2005 Earnings Guidance

Cleveland, OH, November 2, 2005

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

Ceres Group, Inc. • 17800 Royalton Road • Cleveland, Ohio 44136
(440) 572-2400 • (800) 643-2474 • Fax (440) 878-2959 • www.ceresgp.com

Ceres Group, Inc.
Page 2

$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.

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Page 3

“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.

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“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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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

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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.

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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	%

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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^® 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.

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