updated: 10/30/2012 7:40:00 AM
Carmel-based CNO Financial Group Inc. (NYSE: CNO) is reporting a third quarter loss of $5 million, compared to a profit of $179.5 million during the same quarter last year. The company says earnings were "significantly impacted" by an increase to litigation reserves and recent recapitalization efforts. Chief Executive Officer Ed Bonach will be a guest on Inside INdiana Business Television this week.
October 29, 2012
Carmel, Ind. -- CNO Financial Group, Inc. (NYSE: CNO) today announced third quarter of 2012 net loss of $5.0 million, or 2 cents per diluted share, and operating earnings (1) of $25.6 million, or 11 cents per diluted share. Third quarter operating earnings were significantly impacted by our review of actuarial assumptions and an increase to litigation reserves. Third quarter net income was also impacted by the loss on extinguishment of debt related to the previously announced completion of our recapitalization transactions, offset by a reduction to the deferred tax valuation allowance.
"We continue to achieve solid core segment growth and earnings, while also making significant progress in managing our run off business," CEO Ed Bonach said. "Our recently completed recapitalization further strengthened our balance sheet, while increasing financial flexibility and lowering our ongoing costs. We continue to effectively deploy our excess capital and expect share repurchases for the year to come in near the high end of our previously announced range."
Third Quarter 2012 Highlights:
Sales, as defined by total new annualized premium ("NAP") (2): $94.1 million, up 1 percent from 3Q11
Net income (loss) per diluted share: (2) cents, compared to 61 cents in 3Q11
Net operating income (1) per diluted share: 11 cents compared to 12 cents in 3Q11
Adjustments arising from our review of actuarial assumptions reflecting the low interest rate environment: after-tax charge of $27.5 million
Increase to litigation reserves relating to a tentative settlement of cases involving the Other CNO Business segment: after-tax charge of $13.4 million
Loss on extinguishment of debt related to the previously announced recapitalization transactions: after-tax charge of $176.4 million
Reduction to the deferred tax valuation allowance reflecting the higher levels of operating income and taxable investment gains realized year-to-date: increase to net income of $143 million
Unrestricted cash and investments held by our non-insurance companies were $313.6 million at September 30, 2012 and share repurchases of $41.4 million
Nine-month 2012 Highlights:
Sales, as defined by total NAP: $287.7 million, up 6 percent from the first nine months of 2011
Net income per diluted share of 45 cents, compared to 92 cents in the first nine months of 2011
Net operating income (1) per diluted share: 45 cents compared to 43 cents in the first nine months of 2011
The consolidated statutory risk-based capital ratio increased 3 percentage points to 361% during the first nine months of 2012, reflecting statutory earnings of $243 million and dividend payments to the non-insurance holding companies of $198 million
Net operating income excluding significant items in 3Q12 benefited from several items explained further in the Segment Results, including: (i) favorable benefit ratios in the supplemental health and Medicare supplement blocks in the Washington National segment; (ii) favorable mortality experience in the life blocks of the Other CNO Business segment; and (iii) modestly favorable investment results in the Corporate Operations segment.
Bankers Life markets and distributes a variety of insurance products to the middle-income senior market through a dedicated field force of career agents. NAP in 3Q12 was $57.6 million, down 5 percent from 3Q11 with higher sales of life and Medicare supplement products being offset by lower annuity sales as a result of the low interest rate environment and product adjustments. Excluding annuities, NAP in 3Q12 was up 5 percent, driven by an increase in agent force due to gains in agent retention.
Pre-tax operating earnings in 3Q12 compared to 3Q11 were up $1.2 million, or 2 percent. Such increase reflects increased earnings from our annuity business reflecting favorable investment spreads and higher account values, partially offset by higher benefit ratios in the long-term care block in 3Q12. Pre-tax operating earnings in 3Q11 of $79.4 million included approximately $14 million of favorable reserve developments in the long-term care and Medicare supplement blocks.
Washington National markets and distributes supplemental health and life insurance to middle-income consumers through a wholly owned subsidiary and independent insurance agencies. NAP in 3Q12 was $21.4 million, up 7 percent from 3Q11 due to increased sales of core supplemental health and life insurance products. Sales in the quarter benefited from distribution expansion and an increase in voluntary worksite sales, which were up 9 percent.
Pre-tax operating earnings in 3Q12 compared to 3Q11 were up $12.7 million, or 60 percent. Such increase primarily reflects favorable benefit ratios in the supplemental health and Medicare supplement blocks in 3Q12. Pre-tax operating earnings in 3Q11 of $21.2 million included a $6.0 million out-of-period adjustment which reduced earnings.
Colonial Penn markets primarily graded benefit and simplified issue life insurance directly to customers through television advertising, direct mail, the internet and telemarketing. NAP in 3Q12 was $15.1 million, up 19 percent from 3Q11. Sales in the quarter benefited from an increase in lead levels and higher buy rates, which demonstrate the benefits of our increased investment in marketing and advertising.
Pre-tax operating earnings in 3Q12 reflected higher marketing expenses as compared to 3Q11.
This segment's results are significantly impacted by the adoption of the new accounting standard related to deferred acquisition costs. We are no longer able to defer most of Colonial Penn's direct response advertising costs although such costs generate predictable sales and future inforce profits. The amount of our investment in new business during a particular period will have a significant impact on this segment's results. Consistent with our previous guidance and based on our current advertising plan, we expect this segment to report a modest level of earnings in 4Q12.
Other CNO Business consists of blocks of various insurance products that are no longer being actively marketed. Its earnings will often fluctuate between periods.
Results in 3Q12 and 3Q11 reflect reductions in earnings of approximately $43 million and $13 million, respectively, primarily due to the impact of decreased projected future investment yield assumptions related to interest-sensitive insurance products. The results in 3Q12 also reflect a $21 million charge relating to a tentative agreement regarding the material economic terms of a settlement of cases involving changes implemented in late 2011 to some non-guaranteed elements in certain policies sold by Conseco Life Insurance Company prior to its acquisition by our predecessor. We also experienced favorable mortality experience in this segment's life block in 3Q12.
Corporate Operations includes our investment advisory subsidiary and corporate expenses.
Net expenses in 3Q12 and 3Q11 included losses of $10 million and $9 million, respectively, related to the impact of lower interest rates on the values of liabilities for agent deferred compensation and former executive retirement annuities.
Net expenses, excluding corporate interest expense, in 3Q12 compared to 3Q11 were down $20.8 million reflecting: (i) a $15 million increase in the value of Company-owned life insurance; and (ii) a $7 million increase in income from investment trading account activities and an increase in value of certain hedge funds.
Net realized investment gains in 3Q12 were $4.8 million (net of related amortization and taxes), including total other-than-temporary impairment losses of $23.1 million primarily related to two private company investments obtained through the commutation of an investment made by our predecessor in a guaranteed investment contract. Net realized investment gains in 3Q11 were $17.3 million (net of related amortization and taxes), including total other-than-temporary impairment losses of $2.9 million.
During 3Q12 and 3Q11, we recognized decreases to earnings of $2.0 million and $12.9 million, respectively, resulting from an increase in the estimated fair value of embedded derivative liabilities related to our fixed index annuities, net of related amortization and income taxes. Such charges reflect the reduction in market interest rates used to determine the derivative's estimated fair value.
The results for 3Q12 include a $176.4 million loss on extinguishment of debt, net of income taxes, related to the previously announced completion of our recapitalization transactions. The results for 3Q11 include a $.7 million loss on extinguishment of debt, net of income taxes, related to a prepayment under our previous senior secured credit agreement.
The results for both 3Q12 and 3Q11 reflect reductions to the deferred tax valuation allowance, primarily resulting from the impact of our higher levels of operating income on projected future taxable income used to determine recoverable net operating loss carryforwards. We identified a reduction of $155.0 million in 3Q12, of which $143.0 million was recognized in 3Q12 and $12.0 million will be recognized in 4Q12, as we reflect the impact of the lower estimated annual effective tax rate on income for the entire year. We identified a reduction of $143.0 million in 3Q11, all of which was recognized in 3Q11.
Book value per common share, excluding other comprehensive income (loss) (5), increased to $16.70 from $15.88 at December 31, 2011.
Statutory (based on non-GAAP measures) and GAAP Capital Information
Our consolidated statutory risk-based capital ratio decreased 8 percentage points to 361% during 3Q12, reflecting consolidated statutory operating earnings of $60.3 million and the payment of dividends to the non-insurance holding companies of $95 million during the quarter. Based on our continued expectation to generate strong statutory earnings and excess capital, we anticipate total year dividend payments to the holding company of $250 million to $275 million during 2012 ($198 million of which have been paid through September 30, 2012).
We purchased 12.9 million shares of our common stock during the nine months ended September 30, 2012 under our share repurchase program. Such shares were purchased at an aggregate cost of $99.5 million, or $7.72 per share. As of September 30, 2012, we had approximately 229.5 million shares outstanding and had authority to repurchase up to an additional $130.7 million of our common stock. We currently anticipate repurchasing common shares near the high end of the $150 million to $170 million range during 2012. The amount and timing of the share repurchases (if any) will be based on business and market conditions and other factors.
Our debt-to-total capital ratio, excluding accumulated other comprehensive income (3) at September 30, 2012 was 21.3 percent, an increase of 300 basis points from December 31, 2011. The increase in such ratio primarily resulted from the completion of our previously announced recapitalization transactions.
The Company will host a conference call to discuss results on October 30, 2012 at 11:00 a.m. Eastern Daylight Time. Recognizing the potential disruption of Hurricane Sandy, the Company is continuing with its conference call to provide management's comments on the quarter, and to take questions. If deemed necessary, an additional question and answer call may be scheduled. The webcast can be accessed through the Investors section of the company's website: http://ir.CNOinc.com. Participants should go to the website at least 15 minutes before the event to register and download any necessary audio software. During the call, we will be referring to a presentation that will be available the morning of the call at the Investors section of the company's website.
CNO is a holding company. Our insurance subsidiaries - principally Bankers Life and Casualty Company, Washington National Insurance Company and Colonial Penn Life Insurance Company - serve pre-retiree and retired Americans by helping them protect against financial adversity and provide for a more secure retirement. For more information, visit CNO online at www.CNOinc.com.
Source: CNO Financial Group Inc.