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| CNO > SEC Filings for CNO > Form 10-Q on 9-May-2007 | All Recent SEC Filings |
9-May-2007
Quarterly Report
In this section, we review the consolidated financial condition of Conseco at March 31, 2007, and the consolidated results of operations for the three months ended March 31, 2007 and 2006, and, where appropriate, factors that may affect future financial performance. Please read this discussion in conjunction with the accompanying consolidated financial statements and notes.
Our statements, trend analyses and other information contained in this report and elsewhere (such as in filings by Conseco with the SEC, press releases, presentations by Conseco or its management or oral statements) relative to markets for Conseco's products and trends in Conseco's operations or financial results, as well as other statements, contain forward-looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are identified by the use of terms such as "anticipate," "believe," "plan," "estimate," "expect," "project," "intend," "may," "will," "would," "contemplate," "possible," "attempt," "seek," "should," "could," "goal," "target," "on track," "comfortable with," "optimistic" and similar words, although some forward-looking statements are expressed differently. You should consider statements that contain these words carefully because they describe our expectations, plans, strategies and goals and our beliefs concerning future business conditions, our results of operations, financial position, and our business outlook or they state other "forward-looking" information based on currently available information. The "Risk Factors" section of our 2006 Annual Report on Form 10-K provides examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements. Assumptions and other important factors that could cause our actual results to differ materially from those anticipated in our forward-looking statements include, among other things:
o our ability to obtain adequate and timely rate increases on our supplemental health products including our long-term care business;
o mortality, morbidity, usage of health care services, persistency, the adequacy of our previous reserve estimates and other factors which may affect the profitability of our insurance products;
o changes in our assumptions related to the cost of policies produced or the value of policies inforce at the Effective Date;
o our ability to achieve anticipated expense reductions and levels of operational efficiencies including improvements in claims adjudication and continued automation and rationalization of operating systems;
o performance of our investments;
o our ability to identify products and markets in which we can compete effectively against competitors with greater market share, higher ratings, greater financial resources and stronger brand recognition;
o the ultimate outcome of lawsuits filed against us and other legal and regulatory proceedings to which we are subject;
o our ability to remediate the material weakness in internal controls over the actuarial reporting process that we identified at year-end 2006 and to maintain effective controls over financial reporting;
o our ability to continue to recruit and retain productive agents and distribution partners and customer response to new products, distribution channels and marketing initiatives;
o our ability to achieve an upgrade of the financial strength ratings of our insurance company subsidiaries as well as the potential impact of rating downgrades on our business;
o the risk factors or uncertainties listed from time to time in our filings with the SEC;
o regulatory changes or actions, including those relating to regulation of the financial affairs of our insurance companies, such as the payment of dividends to us, regulation of financial services affecting (among other things) bank sales and underwriting of insurance products, regulation of the sale, underwriting and pricing of products, and health care regulation affecting health insurance products;
o general economic conditions and other factors, including prevailing interest rate levels, stock and credit market performance and health care inflation, which may affect (among other things) our ability to sell products and access capital on acceptable terms, the returns on and the market value of our investments, and the lapse rate and profitability of policies; and
o changes in the Federal income tax laws and regulations which may affect or eliminate the relative tax advantages of some of our products.
Other factors and assumptions not identified above are also relevant to the forward-looking statements, and if they prove incorrect, could also cause actual results to differ materially from those projected.
All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statement. Our forward-looking statements speak only as of the date made. We assume no obligation to update or to publicly announce the results of any revisions to any of the forward-looking statements to reflect actual results, future events or developments, changes in assumptions or changes in other factors affecting the forward-looking statements.
We are a holding company for a group of insurance companies operating throughout the United States that develop, market and administer supplemental health insurance, annuity, individual life insurance and other insurance products. We focus on serving the senior and middle-income markets, which we believe are attractive, high growth markets. We sell our products through three distribution channels: career agents, professional independent producers (some of whom sell one or more of our product lines exclusively) and direct marketing.
We manage our business through the following: three primary operating segments, Bankers Life, Conseco Insurance Group and Colonial Penn, which are defined on the basis of product distribution; a fourth segment comprised of other business in run-off; and corporate operations. These segments reflect the addition of Colonial Penn as a separate segment resulting from a change in how management disaggregates the Company's operations for making internal operating decisions beginning in the fourth quarter of 2006. Colonial Penn's operations were previously aggregated with the Bankers Life segment. We have restated all prior period segment disclosures to conform to management's current view of the Company's operating segments. Our segments are described below:
o Bankers Life, which consists of the business of Bankers Life and Casualty Company ("Bankers Life and Casualty"), markets and distributes Medicare supplement insurance, life insurance, long-term care insurance, Medicare Part D prescription drug program and certain annuity products to the senior market through exclusive career agents and sales managers. Bankers Life and Casualty markets its products under its own brand name and Medicare Part D and Medicare Advantage products primarily through marketing agreements with Coventry Health Care ("Coventry").
o Conseco Insurance Group, which markets and distributes specified disease insurance, Medicare supplement insurance, and certain life and annuity products to the senior and middle-income markets through independent marketing organizations that represent independent agents. This segment markets its products under the "Conseco" and "Washington National" (a wholly-owned insurance subsidiary of Conseco) brand names.
o Colonial Penn, which consists of the business of Colonial Penn Life Insurance Company ("Colonial Penn"), markets graded benefit and simplified issue life insurance directly to customers through television advertising, direct mail, the internet and telemarketing. Colonial Penn markets its products under its own brand name.
o Other Business in Run-off, which includes blocks of business that we no longer market or underwrite and are managed separately from our other businesses. This segment consists of long-term care insurance sold in prior years
through independent agents and major medical insurance.
o Corporate operations, which consists of holding company activities and certain noninsurance company businesses that are not related to our operating segments.
We have updated our critical accounting policy related to our accounting for marketing and quota-share agreements with Coventry as we entered into a national distribution agreement under which our career agents began distributing Coventry's Private-Fee-For-Service plan, Advantra Freedom ("PFFS"), beginning January 1, 2007.
Refer to "Critical Accounting Policies" in Conseco's 2006 Annual Report on Form 10-K for information on our other accounting policies that we consider critical in preparing our consolidated financial statements.
Accounting for marketing and quota-share agreements with Coventry
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Modernization Act") provided for the introduction of a prescription drug benefit ("PDP"). In order to offer this product to our current and potential future policyholders without investing in management and infrastructure, we entered into a national distribution agreement with Coventry to use our career and independent agents to distribute Coventry's prescription drug plan, Advantra Rx. We receive a fee based on the premiums collected on plans sold through our distribution channels. In addition, Conseco has a quota-share reinsurance agreement with Coventry for Conseco enrollees that provides Conseco with 50 percent of net premiums and related policy benefits subject to a risk corridor. The Part D program was effective January 1, 2006.
The following describes how we account for and report our PDP business:
Our accounting for the national distribution agreement
o We recognize distribution and licensing fee income from Coventry based upon negotiated percentages of collected premiums on the underlying Medicare Part D contracts.
o We also pay commissions to our agents who sell the plans on behalf of Coventry. These payments are deferred and amortized over the remaining term of the initial enrollment period (the one-year life of the initial policy).
Our accounting for the quota-share agreement
o We recognize premium revenue evenly over the period of the underlying Medicare Part D contracts.
o We recognize policyholder benefits and ceding commission expense as incurred.
o We recognize risk-share premium adjustments consistent with Coventry's risk-share agreement with the Centers for Medicare and Medicaid Services.
CONSECO, INC. AND SUBSIDIARIES
-------------------
The following summarizes the pre-tax loss of the PDP business in the first
three months of 2007 and 2006 (dollars in millions):
Three months ended
March 31,
----------------------
2007 2006
---- ----
Insurance policy income.......................................................... $24.4 $24.2
Fee revenue and other............................................................ .4 1.2
----- -----
Total revenues................................................................. 24.8 25.4
----- -----
Insurance policy benefits........................................................ 23.5 24.2
Commission expense............................................................... 1.4 1.3
Other operating expenses......................................................... .1 1.9
----- -----
Total expense.................................................................. 25.0 27.4
----- -----
Pre-tax loss................................................................... $ (.2) $(2.0)
===== =====
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We receive distribution fees from Coventry and we pay sales commissions to our agents for these enrollments. In addition, we participate at a 53 percent level in the income (loss) related to this business pursuant to a quota-share agreement with Coventry.
The following summarizes our accounting and reporting practices for the PFFS business.
Our accounting for the distribution agreement
o We receive distribution income from Coventry and other parties based on a fixed fee per PFFS contract. This income is deferred and recognized over the remaining calendar year term of the initial enrollment period.
o We also pay commissions to our agents who sell the plans on behalf of Coventry and other parties. These payments are deferred and amortized over the remaining term of the initial enrollment period (the one-year life of the initial policy).
Our accounting for the quota-share agreement
o We recognize revenue evenly over the period of the underlying PFFS contracts.
o We recognize policyholder benefits and ceding commission expense as incurred.
CONSECO, INC. AND SUBSIDIARIES
-------------------
The following summarizes the pre-tax income of the PFFS business in the
first three months of 2007 (dollars in millions):
Insurance policy income.................................. $13.2
Fee revenue and other.................................... .4
-----
Total revenues....................................... 13.6
-----
Insurance policy benefits................................ 11.7
Commission expense....................................... .5
Other operating expenses................................. .8
-----
Total expense........................................ 13.0
-----
Pre-tax income........................................... $ .6
=====
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CONSECO, INC. AND SUBSIDIARIES
-------------------
RESULTS OF OPERATIONS
The following tables and narratives summarize the operating results of our
segments for the periods presented (dollars in millions):
Three months ended
March 31,
-----------------------
2007 2006
---- ----
Income (loss) before net realized investment gains (losses), net of related
amortization and income taxes (a non-GAAP measure) (a):
Bankers Life........................................................................ $ 42.8 $ 57.2
Conseco Insurance Group............................................................. 51.5 41.9
Colonial Penn....................................................................... 4.6 5.1
Other Business in Run-off........................................................... (30.9) 24.0
Corporate operations................................................................ (30.8) (26.0)
------ ------
37.2 102.2
------ ------
Net realized investment gains (losses), net of related amortization:
Bankers Life........................................................................ (4.5) (1.0)
Conseco Insurance Group............................................................. (16.1) (3.6)
Colonial Penn....................................................................... (.2) .5
Other Business in Run-off........................................................... (.2) 3.0
------ ------
(21.0) (1.1)
------ ------
Income (loss) before income taxes:
Bankers Life........................................................................ 38.3 56.2
Conseco Insurance Group............................................................. 35.4 38.3
Colonial Penn....................................................................... 4.4 5.6
Other Business in Run-off........................................................... (31.1) 27.0
Corporate operations................................................................ (30.8) (26.0)
------ ------
Income before income taxes....................................................... $ 16.2 $101.1
====== ======
--------------------
(a) We believe that an analysis of income (loss) before net realized investment
gains (losses), net of related amortization, and income taxes (a non-GAAP
measure) is important to evaluate the financial performance of our
business, and is a measure commonly used in the life insurance industry.
Management uses this measure to evaluate performance because realized gains
or losses can be affected by events that are unrelated to a company's
underlying fundamentals. However, the non-GAAP measure does not replace the
corresponding GAAP measure. The table above reconciles the non-GAAP measure
to the corresponding GAAP measure.
|
General: Conseco is the top tier holding company for a group of insurance companies operating throughout the United States that develop, market and administer supplemental health insurance, annuity, individual life insurance and other insurance products. We distribute these products through our Bankers Life segment, which utilizes a career agency force, through our Conseco Insurance Group segment, which utilizes professional independent producers, and through our Colonial Penn segment, which utilizes direct response marketing. Our Other Business in Run-off segment consists of: (i) long-term care products sold in prior years through independent agents; (ii) small group and individual major medical business which we stopped renewing in 2001; and (iii) other group major medical business which we no longer market. Most of the long-term care business in run-off relates to business written by certain subsidiaries prior to their acquisitions by Conseco in 1996 and 1997.
CONSECO, INC. AND SUBSIDIARIES
-------------------
Bankers Life (dollars in millions):
Three months ended
March 31,
----------------------
2007 2006
---- ----
Premium collections:
Annuities............................................................................ $ 212.2 $ 233.4
Supplemental health.................................................................. 373.4 322.9
Life................................................................................. 48.1 43.2
-------- ---------
Total collections.................................................................. $ 633.7 $ 599.5
======== =========
Average liabilities for insurance products:
Annuities:
Mortality based.................................................................. $ 280.9 $ 274.8
Equity-indexed................................................................... 657.4 413.2
Deposit based.................................................................... 4,551.3 4,344.3
Health............................................................................. 3,473.1 3,209.5
Life:
Interest sensitive............................................................... 364.0 338.5
Non-interest sensitive........................................................... 276.3 227.6
-------- --------
Total average liabilities for insurance
products, net of reinsurance ceded............................................. $9,603.0 $8,807.9
======== ========
Revenues:
Insurance policy income.............................................................. $ 412.0 $ 383.0
Net investment income:
General account invested assets.................................................... 140.7 121.1
Equity-indexed products based on the change in value of options.................... (3.0) 2.4
Other special-purpose portfolios................................................... 3.2 -
Fee revenue and other income......................................................... 1.2 1.4
-------- --------
Total revenues................................................................... 554.1 507.9
-------- --------
Expenses:
Insurance policy benefits............................................................ 345.9 312.7
Amounts added to policyholder account balances:
Annuity products and interest-sensitive life products
other than equity-indexed products............................................... 44.7 41.8
Equity-indexed products............................................................ 2.4 2.5
Amortization related to operations................................................... 81.4 57.4
Other operating costs and expenses................................................... 36.9 36.3
-------- --------
Total expenses................................................................... 511.3 450.7
-------- --------
Income before net realized investment losses, net of related amortization
and income taxes....................................................................... 42.8 57.2
-------- --------
Net realized investment losses....................................................... (5.2) (1.5)
Amortization related to net realized investment losses............................... .7 .5
-------- --------
Net realized investment losses, net of related amortization ..................... (4.5) (1.0)
-------- --------
Income before income taxes................................................................ $ 38.3 $ 56.2
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