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CNO > SEC Filings for CNO > Form 10-Q on 1-Nov-2013All Recent SEC Filings

Show all filings for CNO FINANCIAL GROUP, INC.

Form 10-Q for CNO FINANCIAL GROUP, INC.


1-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

In this section, we review the consolidated financial condition of CNO at September 30, 2013, and the consolidated results of operations for the three and nine months ended September 30, 2013 and 2012, and, where appropriate, factors that may affect future financial performance. Please read this discussion in conjunction with the accompanying consolidated financial statements and notes.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Our statements, trend analyses and other information contained in this report and elsewhere (such as in filings by CNO with the SEC, press releases, presentations by CNO or its management or oral statements) relative to markets for CNO's products and trends in CNO'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 2012 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:

changes in or sustained low interest rates causing reductions in investment income, the margins of our fixed annuity and life insurance businesses, and sales of, and demand for, our products;

expectations of lower future investment earnings may cause us to accelerate amortization, write down the balance of insurance acquisition costs or establish additional liabilities for insurance products;

general economic, market and political conditions, including the performance and fluctuations of the financial markets which may affect the value of our investments as well as our ability to raise capital or refinance existing indebtedness and the cost of doing so;

the ultimate outcome of lawsuits filed against us and other legal and regulatory proceedings to which we are subject;

our ability to make anticipated changes to certain NGEs of our life insurance products;

our ability to obtain adequate and timely rate increases on our health products, including our long-term care business;

the receipt of any required regulatory approvals for dividend and surplus debenture interest payments from our insurance subsidiaries;

mortality, morbidity, the increased cost and 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;

changes in our assumptions related to deferred acquisition costs or the present value of future profits;

the recoverability of our deferred tax assets and the effect of potential ownership changes and tax rate changes on their value;

our assumption that the positions we take on our tax return filings, including our position that our 7.0% Debentures will not be treated as stock for purposes of Section 382 of the Code and will not trigger an ownership change, will not be successfully challenged by the IRS;

changes in accounting principles and the interpretation thereof (including changes in principles related to accounting for deferred acquisition costs);


CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

our ability to continue to satisfy the financial ratio and balance requirements and other covenants of our debt agreements;

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;

performance and valuation of our investments, including the impact of realized losses (including other-than-temporary impairment charges);

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;

our ability to generate sufficient liquidity to meet our debt service obligations and other cash needs;

our ability to maintain effective controls over financial reporting;

our ability to continue to recruit and retain productive agents and distribution partners and customer response to new products, distribution channels and marketing initiatives;

our ability to achieve additional upgrades of the financial strength ratings of CNO and our insurance company subsidiaries as well as the impact of our ratings on our business, our ability to access capital, and the cost of capital;

the risk factors or uncertainties listed from time to time in our filings with the SEC;

regulatory changes or actions, including those relating to regulation of the financial affairs of our insurance companies, such as the payment of dividends and surplus debenture interest to us, regulation of the sale, underwriting and pricing of products, and health care regulation affecting health insurance products; and

changes in the Federal income tax laws and regulations which may affect or eliminate the relative tax advantages of some of our products or affect the value of our deferred tax assets.

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.

The reporting of risk-based capital ("RBC") measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing, advertising or promotional activities.

OVERVIEW

We are a holding company for a group of insurance companies operating throughout the United States that develop, market and administer 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, underserved, high growth markets. We sell our products through three distribution channels:
career agents, independent producers (some of whom sell one or more of our product lines exclusively) and direct marketing.

The Company manages its business through the following operating segments:
Bankers Life, Washington National and Colonial Penn, which are defined on the basis of product distribution; Other CNO Business, comprised primarily of products we no longer sell actively; and corporate operations, comprised of holding company activities and certain noninsurance company businesses. The Company's segments are described below:

Bankers Life, which markets and distributes Medicare supplement insurance, interest-sensitive life insurance, traditional life insurance, fixed annuities and long-term care insurance products to the middle-income senior market through a dedicated field force of career agents and sales managers supported by a network of community-based sales


CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

offices. The Bankers Life segment includes primarily the business of Bankers Life and Casualty Company. Bankers Life also markets and distributes Medicare Advantage plans primarily through distribution arrangements with Humana, Inc. and United HealthCare and PDP through a distribution arrangement with Coventry.

Washington National, which markets and distributes supplemental health (including specified disease, accident and hospital indemnity insurance products) and life insurance to middle-income consumers at home and at the worksite. These products are marketed through Performance Matters Associates, Inc. ("PMA"), a wholly owned subsidiary, and through independent marketing organizations and insurance agencies including worksite marketing. The products being marketed are underwritten by Washington National Insurance Company.

Colonial Penn, which markets primarily graded benefit and simplified issue life insurance directly to customers in the senior middle-income market through television advertising, direct mail, the internet and telemarketing. The Colonial Penn segment includes primarily the business of Colonial Penn Life Insurance Company.

Other CNO Business, which consists of blocks of interest-sensitive life insurance, traditional life insurance, annuities, long-term care insurance and other supplemental health products. These blocks of business are not actively marketed and were primarily issued or acquired by Conseco Life and Washington National Insurance Company.


                   CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
                              ___________________


The following summarizes our earnings for the three and nine months ending
September 30, 2013 and 2012 (dollars in millions, except per share data):

                                                   Three months ended          Nine months ended
                                                     September 30,               September 30,
                                                   2013           2012         2013         2012
Income before net realized investment gains,
fair value changes in embedded derivative
liabilities, equity in earnings of certain
non-strategic investments and earnings
attributable to non-controlling interests,
corporate interest expense, loss on
extinguishment of debt and income taxes
("EBIT" a non-GAAP financial measure) (a):
Bankers Life                                   $     86.3      $   80.6     $   227.5     $ 227.2
Washington National                                  28.1          33.9          89.3        92.5
Colonial Penn                                        (4.2 )        (2.6 )        (8.4 )     (11.8 )
Other CNO Business                                    6.1         (53.6 )        12.3       (54.0 )
EBIT from business segments                         116.3          58.3         320.7       253.9
Corporate operations, excluding corporate
interest expense                                      9.4          (6.7 )        14.8       (17.6 )
EBIT                                                125.7          51.6         335.5       236.3
Corporate interest expense                          (11.7 )       (16.3 )       (39.9 )     (50.4 )
Income before net realized investment gains,
fair value changes in embedded derivative
liabilities, equity in earnings of certain
non-strategic investments and earnings
attributable to non-controlling interests,
loss on extinguishment of debt and income
taxes                                               114.0          35.3         295.6       185.9
Tax expense on operating income                      36.8           9.7         101.0        65.5
Net operating income                                 77.2          25.6         194.6       120.4
Net realized investment gains (losses) (net of
related amortization and taxes)                       (.1 )         4.8          11.1        37.6
Fair value changes in embedded derivative
liabilities (net of related amortization and
taxes)                                                2.2          (2.0 )        15.6        (4.4 )
Equity in earnings of certain non-strategic
investments and earnings attributable to
non-controlling interests (net of taxes)             (3.0 )           -          (7.5 )         -
Loss on extinguishment of debt (net of taxes)           -        (176.4 )       (64.0 )    (176.8 )
Net income (loss) before valuation allowance
for deferred tax assets and other tax items          76.3        (148.0 )       149.8       (23.2 )
Valuation allowance for deferred tax assets
and other tax items                                 206.7         143.0         222.2       143.0
Net income (loss)                              $    283.0      $   (5.0 )   $   372.0     $ 119.8
Per diluted share:
Net operating income                           $      .33      $    .11     $     .83     $   .45
Net realized investment gains (losses) (net of
related amortization and taxes)                         -           .02           .05         .13
Fair value changes in embedded derivative
liabilities (net of related amortization and
taxes)                                                .01          (.01 )         .06        (.02 )
Equity in earnings of certain non-strategic
investments and earnings attributable to
non-controlling interests (net of taxes)             (.01 )           -          (.03 )         -
Loss on extinguishment of debt (net of taxes)           -          (.76 )        (.27 )      (.60 )
Valuation allowance for deferred tax assets
and other tax items                                   .90           .62           .95         .49
Net income (loss)                              $     1.23      $   (.02 )   $    1.59     $   .45


____________


(a) Management believes that an analysis of EBIT provides a clearer comparison of the operating results of the Company from period to period because it excludes: (i) corporate interest expense; (ii) loss on extinguishment of debt; (iii) net realized investment gains; (iv) fair value changes in embedded derivative liabilities that are unrelated to the


CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

Company's underlying fundamentals; and (v) equity in earnings of certain non-strategic investments and earnings attributable to non-controlling interests. Net realized investment gains or losses include: (i) gains or losses on the sales of investments; (ii) other-than-temporary impairments recognized through net income; and (iii) changes in fair value of certain fixed maturity investments with embedded derivatives. The table above reconciles the non-GAAP measure to the corresponding GAAP measure.

CRITICAL ACCOUNTING POLICIES

Liabilities for Insurance Products - reserves for the future payment of long-term care policy claims

We calculate and maintain reserves for the future payment of claims to our policyholders based on actuarial assumptions. For all our insurance products, we establish an active life reserve, a liability for due and unpaid claims, claims in the course of settlement and incurred but not reported claims. In addition, for our health insurance business, we establish a reserve for the present value of amounts not yet due on claims. Many factors can affect these reserves and liabilities, such as economic and social conditions, inflation, hospital and pharmaceutical costs, changes in doctrines of legal liability and extra-contractual damage awards. Therefore, our reserves and liabilities are necessarily based on numerous estimates and assumptions as well as historical experience. Establishing reserves is an uncertain process, and it is possible that actual claims will materially exceed our reserves and have a material adverse effect on our results of operations and financial condition. For example, our long-term care policy claims may be paid over a long period of time and, therefore, loss estimates have a higher degree of uncertainty.

The following summarizes the components of the reserves related to our long-term care business in both our Bankers Life and Other CNO Business segments as of September 30, 2013 and December 31, 2012 (dollars in millions):

                                                          September 30,     December 31,
                                                              2013              2012
Amounts classified as liabilities for insurance
products - traditional products:
Active life reserves                                     $     3,524.2     $     3,441.6
Reserves for the present value of amounts not yet due
on claims                                                      1,247.7           1,213.2
Future loss reserves                                              92.5              76.0
Amounts classified as claims liabilities and other
policyholder liabilities:
Liability for due and unpaid claims, claims in the
course of settlement and incurred but not reported
claims                                                           183.1             181.3
Total                                                    $     5,047.5     $     4,912.1

The significant assumptions used to calculate the active life reserves include morbidity, persistency and investment yields. These assumptions are determined at the issuance date and do not change over the life of the policy.

The significant assumptions used to calculate the reserves for the present value of amounts not yet due on claims include future benefit payments, interest rates and claim continuance patterns. Interest rates are used to determine the present value of the future benefit payments and are based on the investment yield of assets supporting the reserves. Claim continuance assumptions are estimates of the expected period of time that claim payments will continue before termination due to recovery, death or attainment of policy maximum benefits. These estimates are based on historical claim experience for similar policy and coverage types. Our estimates of benefit payments, interest rates and claim continuance are reviewed regularly and updated to consider current portfolio investment yields and recent claims experience.

Pursuant to GAAP, we are required to establish premium deficiency reserves when the aggregate liability on a block of business is deficient. With respect to our long-term care blocks of business, the aggregate liability is not deficient, but our projections of estimated future profits (losses) indicate that profits will be recognized in earlier periods, followed by losses in later periods. In this situation, we are required to recognize future loss reserves. Such reserves are calculated based on our current estimate of the amount necessary to offset the losses in future periods and are established during the period the block is profitable. We estimate the future losses based on our current best estimates of morbidity, persistency, maintenance expense and investment yields, which estimates are generally updated annually. During the first nine months of 2013, we increased the future loss reserves related to our long-term care blocks of business by $16.5 million based on these calculations.


CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

The significant assumptions used to calculate the liability for due and unpaid claims, claims in the course of settlement and incurred but not reported claims are based on historical claim payment patterns and include assumptions related to the number of claims and the size and timing of claim payments. These assumptions are updated quarterly to reflect the most current information regarding claim payment patterns. In order to determine the accuracy of our prior estimates, we calculate the total redundancy (deficiency) of our prior claim reserve estimates. The 2012 claim reserve redundancy (deficiency) for long-term care claim reserves, as measured at September 30, 2013, was $8.9 million (recognized as a reduction to claim expense during 2013 and consisting of $13.3 million for the Bankers Life segment and $(4.4) million for the Other CNO Business segment).

Estimates of unpaid losses related to long-term care business have a higher degree of uncertainty than estimates for our other products due to the range of ultimate duration of these claims and the resulting variability in their cost (in addition to the variations in the lag time in reporting claims). We would not consider a variance of 5-10 percentage points from the initial expected loss ratio to be unusual. As an example, an increase in the initial loss ratio of 5-10 percentage points for claims incurred in 2012 related to our long-term care business (in both our Bankers Life and Other CNO Business segments) would have resulted in an immediate decrease in our earnings of approximately $35 million to $72 million (representing the entire impact of the increase in loss ratio on claims incurred in 2012). Our financial results depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in determining our reserves and pricing our products. If our assumptions with respect to future claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would be required to increase our liabilities, which would negatively affect our operating results.

Liabilities for Insurance Products

At September 30, 2013, the total balance of our liabilities for insurance products was $24.7 billion. These liabilities are generally payable over an extended period of time and the profitability of the related products is dependent on the pricing of the products and other factors. Differences between our expectations when we sold these products and our actual experience could result in future losses.

We calculate and maintain reserves for the future payment of claims to our policyholders based on actuarial assumptions. For our insurance products, we establish an active life reserve, a liability for due and unpaid claims, claims in the course of settlement and incurred but not reported claims. In addition, for our health insurance business, we establish a reserve for the present value of amounts not yet due on claims. Many factors can affect these reserves and liabilities, such as economic and social conditions, inflation, hospital and pharmaceutical costs, changes in doctrines of legal liability and extra-contractual damage awards. Therefore, our reserves and liabilities are necessarily based on numerous estimates and assumptions as well as historical experience. Establishing reserves is an uncertain process, and it is possible that actual claims will materially exceed our reserves and have a material adverse effect on our results of operations and financial condition. We have incurred significant losses beyond our estimates as a result of actual claim costs and persistency of our long-term care business in the Other CNO Business segment. Our financial results depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in determining our reserves and pricing our products. If our assumptions with respect to future claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would be required to increase our liabilities, which would negatively affect our operating results. Liabilities for insurance products are calculated using management's best judgments, based on our past experience and standard actuarial tables, of mortality, morbidity, lapse rates, investment experience and expense levels.

Our assumptions related to our interest-sensitive insurance liabilities are reviewed each quarter. Our review in the third quarter of each year considers information from our annual planning process. During the third quarter of 2013, our review resulted in no significant adjustments. We did not change our long-term interest rate assumptions, as investment results are tracking relatively consistent with our 2013 new money rate assumptions. In addition, we continue to believe our assumptions for future new money rates are reasonable.

Refer to "Critical Accounting Policies" in our 2012 Annual Report on Form 10-K for information on our other accounting policies that we consider critical in preparing our consolidated financial statements.


                   CNO FINANCIAL GROUP, 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         Nine months ended
                                                          September 30,              September 30,
                                                        2013          2012         2013         2012
Income (loss) before net realized investment gains
(losses), fair value changes in embedded derivative
liabilities, net of related amortization, equity in
earnings of certain non-strategic investments and
earnings attributable to non-controlling interests,
loss on extinguishment of debt and income taxes (a
non-GAAP measure) (a):
Bankers Life                                         $    86.3     $   80.6     $   227.5     $ 227.2
Washington National                                       28.1         33.9          89.3        92.5
Colonial Penn                                             (4.2 )       (2.6 )        (8.4 )     (11.8 )
Other CNO Business                                         6.1        (53.6 )        12.3       (54.0 )
Corporate operations                                      (2.3 )      (23.0 )       (25.1 )     (68.0 )
                                                         114.0         35.3         295.6       185.9
Net realized investment gains (losses), net of
related amortization:
Bankers Life                                              (1.6 )       12.7           9.2        38.6
Washington National                                         .7         (3.0 )         1.3         3.6
Colonial Penn                                              (.1 )        2.6             -         7.1
Other CNO Business                                         2.0         (5.7 )         7.6         6.9
Corporate operations                                      (1.2 )         .8          (1.0 )       1.8
                                                           (.2 )        7.4          17.1        58.0
Fair value changes in embedded derivative
liabilities, net of related amortization:
Bankers Life                                               3.4         (3.0 )        23.7        (6.6 )
Other CNO Business                                           -            -            .3         (.1 )
                                                           3.4         (3.0 )        24.0        (6.7 )
Equity in earnings of certain non-strategic
investments and earnings attributable to
. . .
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