CNO

SEC Filing Summary: CNO Financial Group, Inc. (Form 10-K)

Business Context and Reporting Period

Company: CNO Financial Group, Inc. (Conseco, Inc.)
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: CNO is a holding company for insurance subsidiaries serving senior and middle-income markets. Operations are managed through three primary segments: Bankers Life (career agents), Colonial Penn (direct marketing), and Conseco Insurance Group (independent producers). The company emerged from bankruptcy in 2003 and focuses on supplemental health, annuity, and life insurance products.

Key Financial Metrics

Liquidity: As of December 31, 2008, holding companies held $59.0 million in unrestricted cash. The company relies on dividends and surplus debenture interest from insurance subsidiaries to service debt.

Material Changes vs. Prior Period

• Significant Net Loss: The 2008 net loss of $1.1 billion was driven primarily by a $722.7 million loss from discontinued operations and a $404.0 million loss from continuing operations. This compares to a $180 million net loss in 2007.
• Transfer of Senior Health: In November 2008, the company transferred Senior Health Insurance Company of Pennsylvania to an independent trust. This resulted in approximately $1.0 billion in accounting charges, including a $380.5 million write-down of investments and a $298 million increase to the deferred tax valuation allowance.
• Investment Portfolio Decline: The investment portfolio decreased by approximately $2.5 billion in value due to net unrealized losses. Net realized investment losses increased to $262.4 million in 2008 from $158.0 million in 2007, including $162.3 million in writedowns for other-than-temporary declines.
• Equity Erosion: Shareholders' equity dropped from $4.2 billion in 2007 to $1.6 billion in 2008, largely due to the net loss and a $1.5 billion increase in accumulated other comprehensive loss.

Guidance, Outlook, Risks, and Unusual Items

Management Priorities for 2009:

• Managing capital and liquidity to maintain compliance with debt covenants.
• Maintaining growth at Bankers Life and improving profitability at Conseco Insurance Group.
• Completing remediation of material weaknesses in internal controls.
• Reducing enterprise exposure to long-term care business.

Debt Covenants and Liquidity Risks:

• The company is subject to restrictive covenants under its Second Amended Credit Facility, including aggregate risk-based capital ratios and debt-to-capitalization limits. Margins for adverse development are relatively small.
• On March 30, 2009, the company amended its credit facility to provide additional covenant margins through June 30, 2010, but at the cost of higher interest rates and fees.
• Liquidity is constrained by the ability of insurance subsidiaries to pay dividends, which requires regulatory approval. Several key subsidiaries had negative earned surplus as of year-end 2008.

Rating Agency Actions:

• In early 2009, A.M. Best, S&P, and Moody's downgraded the financial strength ratings of the company's primary insurance subsidiaries (to "B", "BB-", and "Ba2", respectively) with negative outlooks.
• These downgrades may lead to increased policy surrenders, reduced new sales, and higher borrowing costs.

Unusual Items:

• Discontinued Operations: A $722.7 million loss from discontinued operations related to the Senior Health transfer.
• Deferred Tax Valuation Allowance: An $856.2 million increase in the valuation allowance in 2008 due to cumulative losses and the Senior Health transaction.

Key Facts for Investor Verification

• Debt Service Capability: Verify the company's ability to generate sufficient cash flow to meet over $165 million in debt service obligations for 2009 and $326.8 million in 2010, given the reliance on regulatory-approved dividends from subsidiaries.
• Covenant Compliance: Monitor the company's compliance with the amended Second Amended Credit Facility covenants, particularly the aggregate risk-based capital ratio and debt-to-total capitalization ratio.
• Long-Term Care Exposure: Assess the ongoing impact of long-term care business, which has historically experienced benefit ratios exceeding 100% (e.g., 169.6% in Conseco Insurance Group and 136.6% in discontinued operations for 2008).
• Investment Portfolio Quality: Review the composition of the investment portfolio, specifically the 9.1% exposure to below-investment-grade fixed maturities and the potential for further other-than-temporary impairment writedowns.
• Internal Controls: Confirm the status of remediation efforts for the material weakness in internal controls over financial reporting related to actuarial reporting processes.