CNO

CNO Financial Group, Inc. (Conseco) - 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for CNO Financial Group, Inc. (Conseco), a holding company for insurance subsidiaries operating in the supplemental health, annuity, and life insurance sectors. The report covers the quarterly and nine-month periods ended September 30, 2008. The company is currently in the process of remediating a material weakness in internal controls over financial reporting identified in 2006 and 2007, which led to restatements of prior financial periods.

Key Financial Metrics

Note: The significant decline in equity is primarily driven by a $1.5 billion total comprehensive loss, largely due to unrealized investment losses and a substantial increase in the valuation allowance for deferred tax assets.

Material Changes vs. Prior Period

• Net Loss Deterioration: The net loss for the nine months ended September 30, 2008, increased significantly to $674.9 million compared to $108.4 million in the same period of 2007. This was driven by a $461.2 million increase in the valuation allowance for deferred tax assets and $549.5 million in net realized investment losses.
• Investment Portfolio Impairments: Net realized investment losses of $549.5 million in the first nine months of 2008 included $380.5 million in writedowns related to investments expected to be transferred to an independent trust (Senior Health) and $117.4 million in other-than-temporary impairments.
• Segment Performance:
  • Bankers Life: Reported income before taxes of $64.1 million (9 months 2008) vs. $176.1 million (9 months 2007), impacted by realized investment losses.
  • Conseco Insurance Group: Turned profitable with $35.3 million income before taxes (9 months 2008) compared to a loss of $86.7 million in 2007, excluding the one-time $76.5 million loss from an annuity coinsurance transaction in 2007.
  • Other Business in Run-off: Reported a loss of $340.7 million (9 months 2008) vs. $174.3 million (9 months 2007), heavily impacted by $385.0 million in realized investment losses related to the Senior Health transfer.
• Restatements: The company restated financial statements for 2006, 2005, and the first three quarters of 2007 due to errors in actuarial systems and reserve calculations.

Guidance, Outlook, and Risks

• Senior Health Transfer: The company plans to transfer Senior Health Insurance Company of Pennsylvania to an independent trust. This transaction is expected to result in total accounting charges of approximately $1.1 billion. A $175 million capital contribution is required upon consummation.
• Investment Volatility: Management expects continued volatility in the valuation of fixed maturity securities and a relatively high level of credit-related investment losses due to stress in financial markets.
• Long-Term Care Rate Increases: The company is aggressively seeking actuarially justified rate increases for long-term care policies. Failure to obtain necessary approvals could require write-offs of insurance acquisition costs and the establishment of premium deficiency reserves.
• Internal Controls: Disclosure controls and procedures were deemed not effective as of September 30, 2008, due to a continuing material weakness in the actuarial reporting process. Remediation is a top priority with a goal of completion by the end of 2008.
• Debt Covenants: The company is currently in compliance with its Second Amended Credit Facility, though the Senior Health transfer is expected to increase the debt-to-total capitalization ratio to 28% (pro forma), still within the 30% limit.

Key Facts for Investor Verification

• Deferred Tax Valuation Allowance: Verify the sustainability of the $461.2 million increase in the valuation allowance and the company's ability to utilize its $5.0 billion in net operating loss carryforwards, which are subject to Section 382 limitations.
• Senior Health Transaction Status: Monitor the regulatory approval status of the transfer to the independent trust and the timing of the $175 million capital contribution.
• Investment Impairments: Assess the extent of "other-than-temporary" impairments in the fixed maturity portfolio, particularly in structured securities and sub-prime collateralized assets.
• Remediation of Internal Controls: Confirm the timeline and effectiveness of the remediation plan for the material weakness in actuarial reporting to ensure future financial statement reliability.
• Liquidity Position: Review the company's ability to meet debt service obligations given the net loss and the potential need for additional capital contributions to insurance subsidiaries.