Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2008, 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, annuity, and individual life insurance products for senior and middle-income markets. The company operates through three primary segments: Bankers Life, Colonial Penn, and Conseco Insurance Group, plus an "Other Business in Run-off" segment and corporate operations.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2008 | Six Months Ended June 30, 2007 (Restated) |
|---|---|---|
| Total Revenues | $2,139.5 million | $2,283.7 million |
| Net Loss | $(492.9) million | $(55.7) million |
| Loss Per Share (Basic & Diluted) | $(2.67) | $(0.44) |
| Net Cash Provided by Operating Activities | $709.6 million | $327.1 million |
| Total Assets | $32,681.0 million | $33,514.8 million (Dec 31, 2007) |
| Total Shareholders' Equity | $3,382.1 million | $4,235.9 million (Dec 31, 2007) |
| Debt (Notes Payable & Investment Borrowings) | $2,013.9 million | $2,106.7 million (Dec 31, 2007) |
Material Changes vs. Prior Period
- Significant Net Loss: The company reported a net loss of $492.9 million for the six months ended June 30, 2008, compared to a net loss of $55.7 million in the same period of 2007. This deterioration was primarily driven by a $370.0 million increase in the valuation allowance for deferred tax assets and $278.9 million in net realized investment losses.
- Investment Impairments: Net realized investment losses increased significantly due to writedowns of investments deemed "other-than-temporary" ($67.3 million) and writedowns related to the planned transfer of Conseco Senior Health Insurance Company to an independent trust ($205.7 million).
- Segment Performance:
- Bankers Life: Reported income before taxes of $36.7 million, down from $110.5 million in 2007, largely due to higher benefit ratios in long-term care and realized investment losses.
- Other Business in Run-off: Reported a loss before taxes of $193.9 million, compared to $156.7 million in 2007, driven by a $204.8 million net realized investment loss related to the Conseco Senior transfer plan.
- Equity Reduction: Shareholders' equity decreased by approximately $854 million from December 31, 2007, to June 30, 2008, reflecting the net loss and a $365.9 million decrease in accumulated other comprehensive loss due to unrealized investment depreciation.
Guidance, Outlook, and Risks
- Conseco Senior Transfer: The company entered into an agreement to transfer Conseco Senior Health Insurance Company to an independent trust. This transaction is expected to result in total accounting charges of approximately $1.2 billion, including a $175 million capital contribution. The transaction is expected to close in the fourth quarter of 2008 pending regulatory approval.
- Investment Portfolio Volatility: Management expects continued volatility in the valuation of fixed maturity securities and a high level of credit-related investment losses due to credit market conditions and widening spreads.
- Long-Term Care Rate Increases: The company is aggressively seeking actuarially justified rate increases for long-term care policies. While approximately 86% of the second round of filings have been approved, there is a risk that not all requested increases will be approved, which could adversely affect financial condition.
- Internal Controls: The company disclosed a material weakness in internal control over financial reporting related to the actuarial reporting process, which continued to exist as of June 30, 2008. Management aims to remediate this by the end of 2008.
- Rating Actions: On August 12, 2008, A.M. Best placed the financial strength ratings of the company's primary insurance subsidiaries under review with developing implications following the announcement of the Conseco Senior transfer.
Investor Verification Checklist
- Deferred Tax Valuation Allowance: Verify the assumptions used to justify the $370 million increase in the valuation allowance and the likelihood of realizing the remaining $1.8 billion in deferred tax assets.
- Conseco Senior Transaction: Monitor the status of the Pennsylvania Insurance Department approval and the final accounting charges associated with the transfer to the independent trust.
- Investment Impairments: Review the criteria used to determine "other-than-temporary" impairments and the potential for further writedowns in the fixed maturity portfolio.
- Long-Term Care Reserves: Assess the adequacy of reserves for the "Other Business in Run-off" segment and the progress of regulatory approvals for premium rate increases.
- Internal Control Remediation: Track the progress of remediation efforts for the material weakness in actuarial reporting controls to ensure future financial statement reliability.