CNO Financial Group, Inc. (Conseco, Inc.) - Q1 2010 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2010. The registrant is Conseco, Inc., a Delaware corporation (trading as CNO Financial Group, Inc., pending shareholder vote). The company operates as a holding company for insurance subsidiaries focusing on supplemental health, annuity, and individual life insurance products for senior and middle-income markets. Operations are managed through three primary segments: Bankers Life, Colonial Penn, and Conseco Insurance Group, plus corporate operations.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $1,002.4 million | $1,069.5 million |
| Net Income | $33.9 million | $24.5 million |
| Diluted EPS | $0.13 | $0.13 |
| Net Operating Income (Non-GAAP) | $38.2 million | $37.5 million |
| Net Cash Provided by Operating Activities | $181.1 million | $122.6 million |
| Total Assets | $30,784.9 million | $30,343.8 million |
| Total Shareholders' Equity | $3,720.1 million | $3,532.4 million |
| Corporate Debt (Notes Payable) | $1,037.2 million | $1,037.4 million |
| Investment Borrowings | $454.5 million | $683.9 million |
Material Changes vs. Prior Period
- Profitability: Net income increased 38% to $33.9 million, driven by improved operating results and reduced impairment charges compared to Q1 2009.
- Revenues: Total revenues decreased 6.3% to $1,002.4 million. Insurance policy income declined from $782.8 million to $664.6 million, largely due to the termination of Private-Fee-For-Service (PFFS) reinsurance agreements with Coventry effective January 1, 2010.
- Investment Performance: Net realized investment losses narrowed significantly to $4.9 million (Q1 2010) from $6.9 million (Q1 2009). Other-than-temporary impairment (OTTI) losses recognized in earnings dropped to $17.7 million from $108.1 million.
- Debt Structure: In February 2010, the company repurchased $64.0 million of 3.5% Debentures and issued $64.0 million of 7.0% Debentures. Investment borrowings decreased by $229.4 million, primarily due to the reclassification of borrowings related to Variable Interest Entities (VIEs) following new accounting guidance.
- Accounting Changes: Adoption of new VIE consolidation guidance (effective Jan 1, 2010) resulted in the consolidation of two additional VIEs (Fall Creek and Eagle Creek), increasing total assets by approximately $275 million and liabilities by $291 million.
Guidance, Outlook, and Risks
- Outlook: Management expects to disaggregate the Conseco Insurance Group segment later in 2010 into "Washington National" and "Other CNO Business." The company anticipates continued pressure on premium collections in certain lines due to rate increases and competition.
- Liquidity: The company projects sufficient cash flow to meet debt service obligations for the next 12 months, relying on operating cash flows, surplus debenture interest, and extraordinary dividends from subsidiaries (subject to regulatory approval).
- Debt Covenants: The company is in compliance with its Senior Credit Agreement. Key ratios as of March 31, 2010:
- Aggregate Risk-Based Capital Ratio: 319% (Required: ≥ 200%)
- Debt to Total Capitalization: 22% (Required: ≤ 30%)
- Interest Coverage Ratio: 1.71 to 1 (Required: ≥ 1.50 to 1)
- Risks:
- Regulatory: Significant risk regarding the approval of extraordinary dividends from insurance subsidiaries to the holding company. Several subsidiaries have negative earned surplus.
- Investment: Exposure to structured securities and below-investment grade assets. Gross unrealized losses on fixed maturities totaled $621.5 million.
- Legal: Numerous pending class actions regarding annuity marketing practices, cost of insurance increases, and securities fraud. While management believes these are without merit, adverse outcomes could be material.
- Tax: A valuation allowance of $1.2 billion exists against deferred tax assets. Future ownership changes could trigger Section 382 limitations on Net Operating Loss (NOL) usage.
Key Facts for Investor Verification
- Dividend Restrictions: Verify the status of regulatory approvals for the projected $70 million in extraordinary dividends from subsidiaries, which are critical for holding company liquidity.
- Investment Portfolio Quality: Review the composition of the $1.6 billion below-investment grade fixed maturity portfolio and the $3.2 billion structured securities portfolio for potential future impairments.
- Legal Exposure: Monitor the status of class action lawsuits regarding "Lifetrend" policies and annuity marketing practices, specifically the class certification hearings scheduled for mid-2010.
- Debt Refinancing: Confirm the successful execution of the May 2010 transaction to repurchase remaining 3.5% Debentures and issue 7.0% Debentures, as disclosed in subsequent events.
- Segment Performance: Analyze the "interest-adjusted benefit ratios" for long-term care products, which remain high (75.2% for Bankers Life, 96.8% for Conseco Insurance Group), indicating potential profitability challenges in these blocks.