Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2006, for Conseco, Inc. (now CNO Financial Group, Inc.). The company is a holding company for a group of insurance companies operating in the United States, focusing on supplemental health insurance, annuities, and individual life insurance for senior and middle-income markets. Operations are conducted through two primary segments: Bankers Life (career agents and direct marketing) and Conseco Insurance Group (independent producers), along with a run-off segment and corporate operations.
Key Financial Metrics
| Metric (in millions) | Q1 2006 | Q1 2005 |
|---|---|---|
| Total Revenues | $1,121.7 | $1,048.0 |
| Net Income | $64.6 | $81.8 |
| Net Income Applicable to Common Stock | $55.1 | $72.3 |
| Diluted Earnings Per Share | $0.35 | $0.44 |
| Net Cash Provided by Operating Activities | $207.0 | $297.7 |
| Total Assets | $31,371.3 | $31,557.3 |
| Total Liabilities | $27,088.0 | $27,037.5 |
| Shareholders' Equity | $4,283.3 | $4,519.8 |
| Corporate Debt (Notes Payable) | $805.3 | $851.5 |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased by approximately 21% to $64.6 million, driven primarily by a significant drop in the Conseco Insurance Group segment's income before taxes ($38.3M vs. $63.5M in 2005).
- Investment Performance: The company reported a net realized investment loss of $3.1 million in Q1 2006, compared to a gain of $1.6 million in Q1 2005. This included $3.5 million in writedowns for other-than-temporary declines in fair value.
- Equity Volatility: Shareholders' equity decreased by $236.5 million, largely due to a $295.9 million decrease in accumulated other comprehensive income resulting from unrealized depreciation on investments.
- Segment Performance:
- Bankers Life: Income before taxes increased slightly to $61.8 million, aided by a 7.2% increase in premium collections.
- Conseco Insurance Group: Income before taxes fell sharply due to higher amortization expenses ($12.4 million increase) related to assumption changes and higher operating costs ($78.8M vs. $69.6M).
- Liquidity: Unrestricted cash and cash equivalents dropped from $237.8 million to $102.9 million, reflecting a net decrease in cash of $134.9 million.
Guidance, Outlook, Risks, and Unusual Items
- Accounting Changes: The company adopted SFAS 123R (Share-Based Payment) on January 1, 2006, recognizing $1.4 million in stock option compensation expense and $3.1 million in restricted stock expense.
- Regulatory Settlements: The company agreed to a $2.5 million fine with the Minnesota Commerce Department regarding market conduct examinations, which was accrued in Q1 2006.
- Long-Term Care Challenges: The "Other Business in Run-off" segment continues to face adverse experience on long-term care policies, particularly in Florida. The company is actively seeking rate increases and has received approval for approximately 73% of requested increases.
- Legal Proceedings: Significant litigation includes the "Cost of Insurance" class action (trial set for October 2006) and various suits related to former director and officer loans. The company estimates a maximum loss of $1.5 million for the securities litigation involving former officers.
- Debt Covenants: The company remains in compliance with its Amended Credit Facility covenants, including a debt-to-total-capitalization ratio of 15% (limit 25%) and interest coverage ratios exceeding minimums.
- Outlook: Management notes that forward-looking statements are subject to risks including regulatory actions, litigation outcomes, and the ability to obtain rate increases on health products.
Investor Verification Checklist
- Investment Portfolio Quality: Verify the extent of unrealized losses ($588.6 million gross) and the criteria used to determine "other-than-temporary" impairments, which impacted earnings.
- Long-Term Care Reserves: Assess the adequacy of reserves for the run-off long-term care block, given the history of adverse claims experience and ongoing regulatory rate increase approvals.
- Litigation Exposure: Monitor the status of the "Cost of Insurance" litigation and the potential for additional accruals beyond current estimates.
- Debt Service Capacity: Review the company's ability to meet mandatory prepayments on the Amended Credit Facility based on excess cash flows.
- Segment Profitability: Analyze the drivers behind the significant decline in the Conseco Insurance Group's profitability, specifically the impact of assumption changes on amortization.