Business Context and Reporting Period
Company: Conseco, Inc. (filing as CNO Financial Group, Inc. in metadata, but identified as Conseco, Inc. in the document)
Filing Type: Form 8-K (Current Report)
Date of Report: November 12, 2008
Event: Completion of the transfer of Senior Health Insurance Company of Pennsylvania ("Senior Health") to the Senior Health Care Oversight Trust, an independent trust. The transaction was approved by the Pennsylvania Insurance Department on November 12, 2008.
Key Financial Metrics and Transaction Details
Capital Contribution: Conseco contributed $175 million to the capital of Senior Health and the Trust, structured as follows:
- Debt: $125 million 6% Senior Note due 2013, payable in five equal annual installments of $25 million.
- Working Capital: $11 million cash contribution to the Trust.
- Cash Equivalents: $39 million cash, including a $35.7 million ceding commission paid by Conseco Life Insurance Company.
Pro Forma Financial Impact (Nine Months Ended Sept 30, 2008):
- Net Loss: Reduced from reported $(674.9) million to pro forma $(28.1) million.
- Loss Per Share: Reduced from reported $(3.65) to pro forma $(0.15).
- Total Assets: Reduced from reported $32,061.7 million to pro forma $28,790.9 million.
- Total Liabilities: Reduced from reported $29,357.7 million to pro forma $26,480.0 million.
Pro Forma Financial Impact (Year Ended Dec 31, 2007):
- Net Loss: Reduced from reported $(194.0) million to pro forma $(95.5) million.
- Loss Per Share: Reduced from reported $(1.12) to pro forma $(0.55).
Material Changes and Adjustments
The pro forma adjustments reflect the removal of Senior Health's long-term care business from Conseco's consolidated results. Key adjustments include:
- Revenue Reduction: Insurance policy income and net investment income were reduced to exclude Senior Health operations.
- Expense Reduction: Insurance policy benefits and operating costs were significantly reduced.
- Debt Increase: Notes payable increased by $125 million to reflect the new senior note issued to the Trust.
- Tax Impact: Significant reduction in the valuation allowance for deferred tax assets ($431.2 million reduction in the 9-month period) due to the transfer.
Outlook, Risks, and Contingencies
Dividend Restriction: As a condition of the Pennsylvania Insurance Department's approval, Conseco agreed not to pay cash dividends on its common stock while any portion of the $125 million note remains outstanding.
Accounting Treatment: The Company is evaluating SFAS No. 144 to determine if Senior Health will be reported as a discontinued operation in future financial statements.
Future Losses: The pro forma balance sheet includes an adjustment of $(393.1) million to retained earnings representing additional losses expected to be recognized subsequent to September 30, 2008, following the completion of the transfer.
Investor Verification Checklist
- Verify the exact terms and covenants of the $125 million Senior Note issued to the Trust.
- Confirm the final determination on whether Senior Health will be classified as a discontinued operation under SFAS No. 144.
- Monitor the impact of the dividend restriction on shareholder returns until the note is fully repaid.
- Review the magnitude of the "additional loss expected" ($393.1 million) and the specific drivers behind this post-transfer liability.
- Assess the liquidity impact of the $50 million cash contribution and $27 million in transaction expenses.