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CNO > SEC Filings for CNO > Form 10-Q on 6-May-2014All Recent SEC Filings

Show all filings for CNO FINANCIAL GROUP, INC.

Form 10-Q for CNO FINANCIAL GROUP, INC.


6-May-2014

Quarterly Report


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

In this section, we review the consolidated financial condition of CNO at March 31, 2014, and its consolidated results of operations for the three months ended March 31, 2014 and 2013, 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," "guidance," "outlook" 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 2013 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 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 non-guaranteed elements 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 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;

closing of the sale of CLIC; 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.

Prior to 2014, the Company managed 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


CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

noninsurance company businesses. As a result of the planned sale of CLIC expected to be completed mid-year 2014 and the coinsurance agreements to cede certain long-term care business effective December 31, 2013 (as further described in the note to the consolidated financial statements entitled "Reinsurance"), management has changed the manner in which it disaggregates the Company's operations for making operating decisions and assessing performance. In periods prior to 2014: (i) the results in the Washington National segment have been adjusted to include the results from the business in the Other CNO Business segment that are being retained; (ii) the Other CNO Business segment included only the long-term care business that was ceded effective December 31, 2013 and the overhead expense of CLIC that is expected to continue after the completion of the sale; and (iii) the CLIC business being sold is excluded from our analysis of business segment results. Beginning on January 1, 2014: (i) the overhead expense of CLIC that is expected to continue after the completion of the sale has been reallocated primarily to the Bankers Life and Washington National segments; (ii) there is no longer an Other CNO Business segment; and
(iii) the CLIC business being sold continues to be excluded from our analysis of business segment results. After the completion of the sale of CLIC: (i) the Bankers Life segment will include the results of certain life insurance business that will be recaptured from Wilton Re; and (ii) the revenues and expenses associated with a transition services agreement and a special support services agreement with Wilton Re will be included in our non-operating earnings. Our prior period segment disclosures have been revised to reflect management's current view of the Company's operating segments. The Company's insurance 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 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 primarily 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 of Texas, Inc. ("PMA") and through independent marketing organizations and insurance agencies including worksite marketing. The products being marketed are underwritten by Washington National.

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 ("Colonial Penn").


                   CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
                              ___________________

The following summarizes our earnings for the three months ending March 31, 2014
and 2013 (dollars in millions, except per share data):
                                                              Three months ended
                                                                  March 31,
                                                             2014            2013
Income before the loss on the operations of CLIC being
sold, the earnings of CLIC being sold, 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                                            $       84.2     $      62.1
Washington National                                             31.1            34.0
Colonial Penn                                                   (6.2 )          (5.4 )
Other CNO Business:
Losses from the long-term care business reinsured
effective December 31, 2013                                        -            (2.7 )
Overhead expense of CLIC allocated to other segments
effective January 1, 2014                                          -            (4.6 )
EBIT from business segments continuing after the CLIC
sale                                                           109.1            83.4
Corporate operations, excluding corporate interest
expense                                                         (6.0 )           3.0
EBIT from operations continuing after the CLIC sale            103.1            86.4
Corporate interest expense                                     (11.1 )         (15.1 )
Operating earnings before taxes                                 92.0            71.3
Tax expense on operating income                                 32.1            25.7
Net operating income                                            59.9            45.6
Earnings of CLIC being sold (net of taxes)                       6.7             5.5
Loss on operations of CLIC being sold (including impact
of taxes)                                                     (298.0 )             -
Net realized investment gains (net of related
amortization and taxes)                                         13.6             8.0
Fair value changes in embedded derivative liabilities
(net of related amortization and taxes)                         (7.2 )           1.3
Equity in earnings of certain non-strategic investments
and earnings attributable to non-controlling interests
(net of taxes)                                                  (3.0 )          (1.8 )
Loss on extinguishment of debt (net of taxes)                      -           (57.2 )
Valuation allowance for deferred tax assets and other
tax items (a)                                                      -            10.5
Net income (loss)                                       $     (228.0 )   $      11.9
Per diluted share:
Net operating income                                    $        .27     $       .19
Earnings of CLIC being sold (net of taxes)                       .03             .02
Loss on operations of CLIC being sold (including impact
of taxes)                                                      (1.35 )             -
Net realized investment gains (net of related
amortization and taxes)                                          .06             .04
Fair value changes in embedded derivative liabilities
(net of related amortization and taxes)                         (.03 )           .01
Equity in earnings of certain non-strategic investments
and earnings attributable to non-controlling interests
(net of taxes)                                                  (.01 )          (.01 )
Loss on extinguishment of debt (net of taxes)                      -            (.24 )
Valuation allowance for deferred tax assets and other
tax items (a)                                                      -             .04
Net income (loss)                                       $      (1.03 )   $       .05


____________________


(a) Increase in valuation allowance of $19.4 million in the three months ended March 31, 2014, related to the expected change in future taxable income following the sale of CLIC, is included in the "loss on operations of CLIC being sold (including impact of taxes)".


CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES



(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) the loss on the operations of CLIC being sold; (ii) the earnings of CLIC being sold; (iii) net realized investment gains or losses, net of related amortization and taxes; (iv) fair value changes due to fluctuations in the interest rates used to discount embedded derivative liabilities related to our fixed index annuities, net of related amortization and taxes; (v) equity in earnings of certain non-strategic investments and earnings attributable to VIEs, net of taxes; (vi) loss on extinguishment of debt, net of taxes; and (vii) changes in the valuation allowance for deferred tax assets. 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

Refer to "Critical Accounting Policies" in our 2013 Annual Report of 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 (dollars in millions):

                                                               Three months ended
                                                                   March 31,
                                                              2014            2013
Pre-tax operating earnings (a non-GAAP measure) (a):
Bankers Life                                             $       84.2     $      62.1
Washington National                                              31.1            34.0
Colonial Penn                                                    (6.2 )          (5.4 )
Corporate operations                                            (17.1 )         (12.1 )
Other CNO Business                                                  -            (7.3 )
                                                                 92.0            71.3
Net realized investment gains (losses), net of related
amortization:
Bankers Life                                                      1.5             7.9
Washington National                                              29.1             4.3
Colonial Penn                                                      .2             (.3 )
Corporate operations                                             (9.9 )            .5
                                                                 20.9            12.4
Fair value changes in embedded derivative liabilities,
net of related amortization:
Bankers Life                                                    (10.9 )           2.1
Washington National                                               (.1 )             -
                                                                (11.0 )           2.1
Equity in earnings of certain non-strategic investments
and earnings attributable to VIEs:
Corporate operations                                             (3.3 )          (1.9 )
Loss on extinguishment of debt:
Corporate operations                                                -           (57.7 )
Amounts related to CLIC being sold:
Earnings of CLIC being sold                                      10.4             8.4
Loss on sale of CLIC                                           (278.6 )             -
                                                               (268.2 )           8.4
Income (loss) before income taxes:
Bankers Life                                                     74.8            72.1
Washington National                                              60.1            38.3
Colonial Penn                                                    (6.0 )          (5.7 )
Corporate operations                                            (30.3 )         (71.2 )
Other CNO Business                                                  -            (7.3 )
Amount related to CLIC being sold                              (268.2 )           8.4
Income (loss) before income taxes                        $     (169.6 )   $      34.6


CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES



(a) These non-GAAP measures as presented in the above table and in the following segment financial data and discussions of segment results exclude the loss on the operations of CLIC being sold, the earnings of CLIC being sold, 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 VIEs, loss on extinguishment of debt and before income taxes. These are considered non-GAAP financial measures. A non-GAAP measure is a numerical measure of a company's performance, financial position, or cash flows that excludes or includes amounts that are normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP.

These non-GAAP financial measures of "pre-tax operating earnings" differ from "income (loss) before income taxes" as presented in our consolidated statement of operations prepared in accordance with GAAP due to the exclusion of the loss on the operations of CLIC being sold, the earnings of CLIC being sold, 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 VIEs and loss on extinguishment of debt. We measure segment performance excluding these items because we believe that this performance measure is a better indicator of the ongoing businesses and trends in our business. Our primary investment focus is on investment income to support our liabilities for insurance products as opposed to the generation of realized investment gains (losses), and a long-term focus is necessary to maintain profitability over the life of the business. Realized investment gains (losses), fair value changes in embedded derivative liabilities and equity in earnings of certain non-strategic investments and earnings attributable to VIEs depend on market conditions and do not necessarily relate to decisions regarding the underlying business of our segments. However, "pre-tax operating earnings" does not replace "income (loss) before income taxes" as a measure of overall profitability.

We may experience realized investment gains (losses), which will affect future earnings levels since our underlying business is long-term in nature and we need to earn the assumed interest rates on the investments backing our liabilities for insurance products to maintain the profitability of our business. In addition, management uses this non-GAAP financial measure in its budgeting process, financial analysis of segment performance and in assessing the allocation of resources. We believe these non-GAAP financial measures enhance an investor's understanding of our financial performance and allows them to make more informed judgments about the Company as a whole. These measures also highlight operating trends that might not otherwise be transparent. The table above reconciles the non-GAAP measure to the corresponding GAAP measure.

General: CNO is the top tier 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 distribute these products through our Bankers Life segment, which utilizes a career agency force, through our Washington National segment, which utilizes independent producers and through our Colonial Penn segment, which utilizes direct response marketing.


                   CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
                              ___________________

Bankers Life (dollars in millions)

                                                              Three months ended
                                                                   March 31,
                                                             2014            2013
Premium collections:
Annuities                                                $     190.5     $     165.6
Medicare supplement and other supplemental health              315.5           335.1
Life                                                            94.0            89.5
Total collections                                        $     600.0     $     590.2
Average liabilities for insurance products:
Fixed index annuities                                    $   3,462.8     $   3,038.8
Deferred annuities                                           3,983.1         4,245.7
SPIAs and supplemental contracts:
Mortality based                                                203.1           229.2
Deposit based                                                  150.1           158.6
Health:
Long-term care                                               4,568.0         4,837.7
Medicare supplement                                            338.2           337.4
Other health                                                    46.5            45.1
Life:
Interest sensitive                                             533.2           467.6
Non-interest sensitive                                         672.4           570.5
Total average liabilities for insurance products, net of
reinsurance ceded                                        $  13,957.4     $  13,930.6
Revenues:
Insurance policy income                                  $     416.3     $     418.0
Net investment income:
General account invested assets                                219.8           212.8
Fixed index products                                             4.6            48.9
Fee revenue and other income                                     5.3             3.7
Total revenues                                                 646.0           683.4
Expenses:
Insurance policy benefits                                      365.7           373.8
Amounts added to policyholder account balances:
Cost of interest credited to policyholders                      32.9            35.9
Cost of options to fund index credits, net of
forfeitures                                                     12.0            11.8
Market value changes credited to policyholders                   4.4            49.0
Amortization related to operations                              48.2            54.5
Interest expense on investment borrowings                        1.9             1.4
Other operating costs and expenses                              96.7            94.9
Total benefits and expenses                                    561.8           621.3
Income before net realized investment gains, net of
. . .
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