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 U.S. The report covers the quarterly and nine-month periods ended September 30, 2007. The company markets supplemental health, annuity, and life insurance products through career agents, independent producers, and direct marketing channels.
Key Financial Metrics (Nine Months Ended Sept 30, 2007)
- Revenue: Total revenues were $3,458.9 million, compared to $3,324.1 million in the prior year period.
- Net Income (Loss): The company reported a net loss of $103.2 million, a significant decline from net income of $90.7 million in the prior year. Net loss applicable to common stock was $117.3 million.
- Earnings Per Share (Diluted): Loss of $(0.69) per share, compared to income of $0.41 per share in the prior year.
- Cash Flow: Net cash provided by operating activities was $549.4 million. Net cash used by investing activities was $972.8 million. Net cash provided by financing activities was $429.8 million.
- Debt and Liquidity: Total liabilities were $31,857.9 million. Investment borrowings increased to $913.7 million. Unrestricted cash and cash equivalents totaled $392.3 million.
- Shareholders' Equity: Total shareholders' equity decreased to $4,303.7 million from $4,713.1 million at year-end 2006, primarily due to the net loss and unrealized investment losses.
Material Changes vs. Prior Period
- Loss on Annuity Coinsurance: A primary driver of the loss was a $76.5 million pre-tax loss recognized in the third quarter related to a coinsurance transaction transferring older equity-indexed and fixed annuity business to Reassure America Life Insurance Company (REALIC).
- Litigation Settlement Costs: Costs related to the "Cost of Insurance" litigation settlement totaled $64.4 million for the nine months ended September 30, 2007, compared to $174.7 million in the prior year period. These costs represent adjustments to initial estimates.
- Investment Performance: Net realized investment losses were $114.3 million, compared to $28.6 million in the prior year. This included $73.7 million in writedowns related to the coinsurance transaction and losses on sales of securities collateralized by sub-prime residential mortgages.
- Reserve Adjustments: The "Other Business in Run-off" segment recorded a $118 million increase in claim liabilities for long-term care policies in the second quarter due to changes in reserve assumptions regarding claim duration and inflation benefits.
- Preferred Stock Conversion: In May 2007, all Class B mandatorily convertible preferred stock was converted into common stock, increasing outstanding shares by 37.8 million.
Guidance, Outlook, Risks, and Unusual Items
- Internal Controls: Management concluded that disclosure controls and procedures were not effective as of September 30, 2007, due to a material weakness in internal control over the actuarial reporting process. Remediation efforts are ongoing.
- Rating Downgrades: On August 7, 2007, A.M. Best downgraded the financial strength ratings of primary insurance subsidiaries to "B+ (Good)" with a negative outlook. Conseco Senior Health Insurance Company was downgraded to "C++ (Marginal)". S&P and Moody's also revised outlooks to negative.
- Long-Term Care Rate Increases: The company is aggressively seeking regulatory approval for premium rate increases on long-term care policies to address adverse experience. Failure to obtain these increases could require the establishment of premium deficiency reserves.
- Sub-Prime Exposure: The company holds structured securities collateralized by sub-prime residential mortgage loans with a market value of $149.3 million. The company has reduced exposure by selling certain securities, recognizing a $29 million loss.
- Subsequent Event: On October 31, 2007, the company announced an agreement to recapture a block of traditional life insurance from REALIC for a $63 million fee, effective October 1, 2007.
Investor Verification Checklist
- Verify the status and regulatory approval progress of the long-term care premium rate increase filings.
- Monitor the remediation timeline for the material weakness in internal controls over actuarial reporting.
- Assess the impact of the $76.5 million coinsurance loss and the subsequent $63 million recapture transaction on future earnings.
- Review the company's exposure to sub-prime mortgage-backed securities and potential for further writedowns.
- Track the financial strength ratings of insurance subsidiaries and the potential impact of further downgrades on business operations.
- Confirm the adequacy of claim reserves for the "Other Business in Run-off" segment given the recent $118 million adjustment.