Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2005, 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. The company operates through three primary segments: Bankers Life, Conseco Insurance Group, and Other Business in Run-Off. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 2005 | Q1 2004 |
|---|---|---|
| Total Revenues | $1,048.0 million | $1,110.6 million |
| Net Income | $81.8 million | $72.8 million |
| Net Income Applicable to Common Stock | $72.3 million | $49.9 million |
| Earnings Per Share (Basic) | $0.48 | $0.50 |
| Earnings Per Share (Diluted) | $0.44 | $0.50 |
| Total Assets | $30,701.7 million | $30,755.5 million (Dec 31, 2004) |
| Total Liabilities | $26,906.8 million | $26,853.3 million (Dec 31, 2004) |
| Shareholders' Equity | $3,794.9 million | $3,902.2 million (Dec 31, 2004) |
| Cash and Cash Equivalents | $287.4 million | $776.6 million (Dec 31, 2004) |
| Net Cash Provided by Operating Activities | $297.7 million | $210.6 million |
| Corporate Debt (Notes Payable) | $758.4 million | $758.9 million (Dec 31, 2004) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by $62.6 million (5.6%) compared to Q1 2004, primarily driven by a decrease in net realized investment gains ($1.6 million in 2005 vs. $27.1 million in 2004) and lower insurance policy income.
- Profitability Increase: Despite lower revenues, Net Income increased by $9.0 million (12.4%) due to reduced expenses, specifically a $77.4 million decrease in interest expense and lower operating costs.
- Investment Portfolio: Total investments increased slightly to $24.6 billion. However, Accumulated Other Comprehensive Income (AOCI) decreased by $181.9 million due to unrealized losses on investments, reducing total shareholders' equity.
- Cash Position: Cash and cash equivalents dropped significantly from $776.6 million to $287.4 million, driven by a net cash outflow of $719.8 million in investing activities (purchases of investments exceeded sales and maturities).
- Segment Performance:
- Bankers Life: Income before taxes decreased to $60.7 million from $67.4 million, largely due to lower realized investment gains.
- Conseco Insurance Group: Income before taxes decreased to $63.5 million from $69.3 million, impacted by a shift from realized gains to losses and lower premium collections.
- Corporate: Loss before taxes improved significantly to $(20.6) million from $(41.9) million, primarily due to lower interest expense following debt refinancing.
Outlook, Risks, and Contingencies
- Guidance: The filing does not provide specific numerical guidance for the full year 2005. Management expects to increase annuity sales efforts in the Conseco Insurance Group segment during the remainder of 2005.
- Long-Term Care Risks: The "Other Business in Run-Off" segment faces significant challenges with long-term care products, particularly in Florida. Regulatory orders require offering policyholders options including rate increases or reduced benefits. Adverse claim experience continues to exceed expectations, resulting in high benefit ratios (94.47% in Q1 2005).
- Litigation:
- Securities Litigation: A consolidated class action regarding the predecessor's bankruptcy remains pending; the company estimates a maximum potential loss of $3.0 million related to indemnification obligations.
- Cost of Insurance Litigation: Nationwide class actions regarding "Lifestyle" and "Lifetime" policies have been certified. The company believes these are without merit but cannot predict the outcome.
- Russell ERISA Settlement: A tentative settlement of $10 million has been reached regarding a 401(k) fiduciary breach claim. The company expects to recover a substantial portion from its insurance carrier, RLI, though RLI has filed a declaratory judgment action contesting coverage.
- Tax Contingencies: The company holds significant net operating loss carryforwards ($4.5 billion) and capital loss carryforwards ($1.1 billion). A valuation allowance of $1.6 billion is maintained. The utilization of these losses is subject to IRS examination regarding Section 382 limitations and the classification of losses related to the former Conseco Finance Corp.
- Debt Covenants: The company is subject to strict covenants under its $800 million Credit Facility, including debt-to-capitalization and interest coverage ratios. As of March 31, 2005, the company was in compliance with all covenants.
Investor Verification Checklist
- Long-Term Care Reserve Adequacy: Verify the sufficiency of reserves for the run-off long-term care block, given the high benefit ratios and regulatory pressure in Florida.
- Tax Asset Realization: Confirm the status of the IRS examination regarding the $4.1 billion tax loss from Conseco Finance Corp. and the potential impact of Section 382 limitations on future earnings.
- Litigation Exposure: Monitor the outcome of the "Cost of Insurance" class action certification and the RLI insurance coverage dispute regarding the $10 million Russell settlement.
- Investment Portfolio Quality: Review the composition of the $751.3 million below-investment grade portfolio and the $9.1 billion in securities with unrealized losses to assess potential future impairment charges.
- Liquidity Management: Assess the company's ability to maintain liquidity given the significant drop in cash reserves and the reliance on insurance subsidiary dividends to service corporate debt.