CNO

CNO Financial Group, Inc. (Conseco) 2009 10-K Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2009. CNO Financial Group, Inc. (Conseco) 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 the senior and middle-income markets. The company operates through three primary segments: Bankers Life (career agents), Colonial Penn (direct marketing), and Conseco Insurance Group (independent producers). The company emerged from bankruptcy reorganization in 2003 and continues to manage legacy risks, particularly in long-term care.

Key Financial Metrics (Year Ended Dec 31, 2009)

Note: 2008 results included a significant loss from discontinued operations related to the transfer of Senior Health Insurance Company to an independent trust.

Material Changes vs. Prior Period

• Profitability Recovery: The company returned to profitability in 2009 ($85.7 million net income) compared to a massive loss in 2008. This improvement was driven by the absence of discontinued operation losses, improved operating income, and reduced net realized investment losses.
• Revenue Growth: Total revenues increased 3.6% to $4.34 billion, primarily due to higher net investment income ($1.29 billion vs. $1.18 billion) and insurance policy income, despite a decline in premium collections.
• Premium Collection Decline: Total premium collections decreased 9.1% to $4.11 billion. This was driven by lower sales of equity-indexed annuities and Medicare supplement products, as well as the termination of certain quota-share reinsurance agreements with Coventry.
• Investment Performance: Net realized investment losses improved significantly to $60.5 million in 2009 from $262.4 million in 2008. However, the company still recorded $195.4 million in writedowns for other-than-temporary declines in fair value.
• Capital Position: Shareholders' equity more than doubled to $3.5 billion, bolstered by recapitalization transactions (issuance of common stock and convertible debentures) and retained earnings.

Guidance, Outlook, and Risks

Management Commentary & Outlook: Management's 2010 priorities include maintaining growth at Bankers Life, improving the profitability mix at Conseco Insurance Group, and remediating material weaknesses in internal controls. The company expects to fund its 2010 debt obligations, including a potential repurchase of 3.5% Debentures, primarily through the issuance of additional 7.0% Debentures.

Key Risks and Contingencies:

• Debt Covenants & Liquidity: The company has substantial indebtedness ($1.05 billion) and is subject to restrictive covenants under its Senior Credit Agreement. Failure to meet financial ratios (e.g., Risk-Based Capital, Debt-to-Capitalization) could trigger a default, potentially leading to acceleration of debt and a "going concern" qualification.
• Long-Term Care (LTC) Performance: LTC blocks in the Conseco Insurance Group segment continue to show high benefit ratios (186.7% in 2009), indicating significant underpricing. The company relies on regulatory approval for rate increases to mitigate future losses.
• Financial Strength Ratings: Ratings remain below investment grade (A.M. Best: "B", S&P: "BB-", Moody's: "Ba2"). Downgrades or failure to upgrade could impair sales, increase agent attrition, and raise the cost of capital.
• Internal Controls: A material weakness in internal controls over actuarial reporting for specified disease policies persisted as of December 31, 2009, though remediation efforts are ongoing.
• Investment Portfolio: The portfolio remains exposed to interest rate risk and credit risk, particularly in structured securities. Further other-than-temporary impairment charges are possible.

Investor Verification Checklist

• Debt Covenant Compliance: Verify the company's ability to maintain the required Risk-Based Capital (RBC) ratio (currently 309% vs. 200% requirement) and Debt-to-Capitalization ratio (21.6% vs. 32.5% limit) to avoid default.
• Long-Term Care Rate Increases: Monitor regulatory approvals for premium rate increases on underperforming LTC blocks, particularly in the Conseco Insurance Group segment, to prevent further erosion of earnings.
• Internal Control Remediation: Confirm the successful remediation of the material weakness in actuarial reporting for specified disease policies to ensure reliable financial reporting.
• Investment Impairments: Review the composition of the investment portfolio for potential future other-than-temporary impairment (OTTI) charges, especially in structured securities and below-investment-grade holdings.
• Dividend Restrictions: Note that the company is prohibited from paying cash dividends on common stock while the $125 million Senior Note (related to the Senior Health transfer) remains outstanding and due to credit agreement restrictions.