CNO Financial Group, Inc. (Conseco) 2005 10-K Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2005. 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 senior and middle-income markets. The company emerged from Chapter 11 bankruptcy in September 2003 and implemented fresh start accounting. Operations are conducted through three segments: Bankers Life (career agents and direct marketing), Conseco Insurance Group (independent producers), and Other Business in Run-off (legacy long-term care and major medical blocks).
Key Financial Metrics
| Metric | 2005 | 2004 |
|---|---|---|
| Total Revenues | $4,326.5 million | $4,330.0 million |
| Net Income | $324.9 million | $294.8 million |
| Net Income Applicable to Common Stock | $286.9 million | $229.3 million |
| Diluted EPS | $1.76 | $1.63 |
| Total Assets | $31,557.3 million | $30,764.6 million |
| Shareholders' Equity | $4,519.8 million | $3,902.2 million |
| Corporate Debt Outstanding | $851.5 million | $768.0 million |
| Premium Collections | $3,925.9 million | $3,881.4 million |
Investment Portfolio: Total investments were $25.0 billion, with an average yield of 5.6% on fixed maturities. Net realized investment losses were $2.9 million in 2005, compared to gains of $40.6 million in 2004.
Material Changes vs. Prior Period
- Profitability: Net income increased by approximately 10% to $324.9 million, driven by improved operating results and a reduction in the deferred income tax valuation allowance of $585.8 million.
- Premium Growth: First-year collected premiums increased 10% to $1,378.9 million. The Conseco Insurance Group segment saw a 75% increase in first-year premiums, while Bankers Life grew 3.9%.
- Expense Reduction: The company exceeded its expense savings target, reducing net operating expenses (excluding commissions) by $43 million against a goal of $30 million.
- Debt Structure: In August 2005, the company issued $330 million of convertible debentures and amended its credit facility, resulting in a total corporate debt balance of $851.5 million at year-end.
- Reserve Adjustments: A new seriatim-based valuation system for long-term care run-off business resulted in a $38 million decrease in liabilities, partially offset by a $40 million increase due to updated claims cost studies.
Guidance, Outlook, and Risks
Management Commentary & Outlook: Management's 2006 priorities include strengthening the balance sheet, increasing sales and revenue growth, and further reducing operating expenses. The company expects to increase annuity sales efforts in the Conseco Insurance Group segment. First-year premium growth is a key focus.
Ratings: Financial strength ratings for primary subsidiaries were upgraded in 2005 and early 2006. A.M. Best assigned a "B++ (Very Good)" rating with a positive outlook; S&P assigned "BB+" with a positive outlook; and Moody's upgraded to "Baa3" with a positive outlook. Conseco Senior (holding the run-off long-term care block) retains lower ratings ("B", "CCC", "Caa1").
Key Risks and Contingencies:
- Long-Term Care (LTC) Run-off: The "Other Business in Run-off" segment continues to face adverse claims experience. The benefit ratio for this segment was 97.8% in 2005. Regulatory orders in Florida require rate increases or benefit reductions for specific home health care policies.
- Interest Rate Risk: The company has a duration gap (assets 6.6 years vs. liabilities 7.3 years). A 10% increase in interest rates could reduce the fair value of fixed maturity securities by approximately $685 million.
- Legal Proceedings: The company faces class action lawsuits regarding cost of insurance charges on life policies, with potential liabilities exceeding established reserves.
- Dividend Restrictions: The holding company's ability to pay dividends is constrained by state insurance regulations and credit facility covenants. All planned 2006 dividends from subsidiaries require regulatory approval.
Investor Verification Checklist
- Long-Term Care Reserve Adequacy: Verify the stability of the benefit ratio in the "Other Business in Run-off" segment and the success of rate increase approvals in non-Florida jurisdictions.
- Rating Agency Trajectory: Monitor progress toward achieving "A" category ratings from A.M. Best, which is critical for sales competitiveness and agent retention.
- Deferred Tax Asset Realization: Confirm the status of the IRS examination regarding the allocation of the CFC loss and cancellation of indebtedness income, which impacts the $1.04 billion valuation allowance.
- Debt Covenants: Review compliance with the Amended Credit Facility covenants, specifically the debt-to-total capitalization and interest coverage ratios.
- Investment Portfolio Quality: Assess the 4.4% exposure to below-investment-grade fixed maturities and the potential for further other-than-temporary impairment writedowns.