Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2004, for CNO Financial Group, Inc. (formerly Conseco, Inc.). The company operates as a holding company for insurance subsidiaries focusing on supplemental health, annuity, and individual life insurance products. The reporting reflects the company's status as a "Successor" entity following its emergence from Chapter 11 bankruptcy reorganization in September 2003, which necessitated the application of "fresh start" accounting. Consequently, financial results for periods prior to August 31, 2003, are not comparable to current results.
Key Financial Metrics
Revenue and Profitability (Nine Months Ended Sept 30, 2004):
- Total Revenues: $3,219.0 million (vs. $366.3 million in the one month ended Sept 30, 2003).
- Net Income: $208.4 million (vs. $24.2 million in the one month ended Sept 30, 2003).
- Net Income Applicable to Common Stock: $152.4 million.
- Earnings Per Share (Basic): $1.21 (vs. $0.19 in the one month ended Sept 30, 2003).
- Earnings Per Share (Diluted): $1.15 (vs. $0.17 in the one month ended Sept 30, 2003).
Balance Sheet Highlights (Sept 30, 2004):
- Total Assets: $30,926.2 million (up from $29,973.5 million at Dec 31, 2003).
- Total Investments: $23,971.3 million, primarily actively managed fixed maturities ($21,306.3 million).
- Cash and Cash Equivalents: $1,096.9 million ($1,078.0 million unrestricted).
- Total Liabilities: $27,197.4 million.
- Total Shareholders' Equity: $3,728.8 million (up from $2,817.6 million at Dec 31, 2003).
Debt and Liquidity:
- Corporate Notes Payable: $788.6 million (refinanced from a previous $1.3 billion facility).
- Investment Borrowings: $584.8 million.
- Debt to Total Capital Ratio: 17% (excluding accumulated other comprehensive income: 19%).
- Operating Cash Flow: Net cash provided by operating activities was $773.4 million for the nine months ended Sept 30, 2004.
Material Changes vs. Prior Period
The filing presents a "Successor" vs. "Predecessor" comparison due to the bankruptcy reorganization. Direct year-over-year comparisons are limited by the fresh start accounting implementation on August 31, 2003.
- Capital Structure: In Q2 2004, the company completed public offerings of common and preferred stock, raising net proceeds of $1,550.1 million. These proceeds were used to redeem $928.9 million of Class A preferred stock and repay $620.7 million of the previous credit facility.
- Debt Refinancing: On June 22, 2004, the company entered a new $800.0 million Credit Facility, replacing the previous $1.3 billion facility. This resulted in a $2.8 million gain on extinguishment of debt.
- Segment Performance:
- Bankers Life: Pre-tax income of $175.7 million for the nine months ended Sept 30, 2004.
- Conseco Insurance Group: Pre-tax income of $202.8 million for the nine months ended Sept 30, 2004.
- Other Business in Run-Off: Pre-tax income of $49.8 million for the nine months ended Sept 30, 2004 (vs. a loss of $171.3 million in the eight months ended Aug 31, 2003).
- Investment Portfolio: Net realized investment gains were $27.5 million for the nine months ended Sept 30, 2004, including $17.8 million in writedowns for other-than-temporary impairments.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook:
- Rating Upgrades: Financial strength ratings for primary insurance subsidiaries were upgraded by A.M. Best (to B++), S&P (to BB+), and Moody's (to Ba1) in 2004, though Conseco Senior remains at lower ratings (B/CCC/Caa1).
- Long-Term Care Challenges: The "Other Business in Run-Off" segment continues to face adverse claims experience on long-term care products. The loss ratio for this segment was 97.06% for the nine months ended Sept 30, 2004. Regulatory orders in Florida require rate increases or policy modifications for certain home health care policies.
- Executive Transition: The company incurred $13.5 million in expenses related to the termination of the former CEO and the hiring of a new CEO in Q3 2004.
Risks and Contingencies:
- Legal Proceedings: The company is involved in numerous lawsuits, including securities fraud class actions, sales practice litigation, and collection efforts against former directors and officers regarding D&O loans. A partial summary judgment of $62.7 million was granted in favor of the company in one D&O loan case, though it is under appeal.
- Regulatory Compliance: The company is working to comply with Section 404 of the Sarbanes-Oxley Act regarding internal controls. Failure to do so could impact investor confidence.
- Credit Facility Covenants: The company must maintain specific financial ratios (e.g., interest coverage, debt-to-capital). Default could lead to acceleration of debt and potential re-entry into bankruptcy.
- Tax Attributes: The company has significant net operating loss carryforwards ($4.9 billion) and capital loss carryforwards ($1.1 billion), but a full valuation allowance is maintained due to uncertainty regarding realization.
Investor Verification Checklist
- Long-Term Care Loss Ratios: Verify the sustainability of the 97% loss ratio in the run-off segment and the impact of pending regulatory rate approvals in Florida and other states.
- Debt Covenant Compliance: Confirm the company's ability to maintain the required interest coverage ratio (currently >2.85:1.0) and debt-to-capital ratio (currently 19%) under the new Credit Facility.
- Legal Exposure: Monitor the status of the $62.7 million D&O loan judgment appeal and the aggregate potential liability from ongoing securities and sales practice litigation.
- Investment Impairments: Review the $17.8 million in writedowns for other-than-temporary impairments and assess the risk of further credit losses in the below-investment grade portfolio (3.6% of fixed maturities).
- Capital Adequacy: Assess the Risk-Based Capital (RBC) ratios, particularly for Conseco Senior, which is noted to be near the "Company Action Level" requiring a corrective plan.