CNO Financial Posts Profit Increase

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Carmel-based CNO Financial Group Inc. (NYSE: CNO) is reporting second quarter net income of $77.1 million, compared to $65.7 million during the same period the previous year. The company says sales increased five percent in the quarter.

July 29, 2013

News Release

Carmel, Ind. -- CNO Financial Group, Inc. (NYSE: CNO) today announced second quarter of 2013 net income of $77.1 million, or 34 cents per diluted share, and operating earnings (1) of $67.7 million, or 30 cents per diluted share.

"The vitality and stability of CNO's business model continues to produce solid results, with sales momentum increasing, and consistent growth in core business premium income and profitability," CEO Ed Bonach said. "Our strong financial results and position also continue to drive ratings upgrades, free cash flow, shareholder dividends and our ongoing share repurchase program."

Second Quarter 2013 Highlights

•Sales, as defined by total new annualized premium ("NAP") (2): $102.3 million, up 5% from 2Q12

•Net income per diluted share: 34 cents, compared to 24 cents in 2Q12

•Net operating income (1) per diluted share: 30 cents compared to 20 cents in 2Q12

•Unrestricted cash and investments held by our holding company were $230 million at June 30, 2013

Six-month 2013 Highlights

•Sales, as defined by total NAP (2): $200.4 million, up 4% from the first six months of 2012

•Net income per diluted share of 38 cents (including a loss on extinguishment of debt of 27 cents), compared to 45 cents in the first six months of 2012

•Net operating income (1) per diluted share: 50 cents compared to 35 cents in the first six months of 2012

•The consolidated statutory risk-based capital ratio increased 9 percentage points to 376% during the first six months of 2013, reflecting statutory operating earnings of $214.6 million and dividend payments to the holding company of $138.5 million

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Segment Results

Bankers Life markets and distributes a variety of insurance products to middle-income Americans at or near retirement through a dedicated field force of career agents. NAP in 2Q13 was $63.2 million, up 6 percent from 2Q12 with higher sales of life and supplemental health products being offset by lower sales of long-term care and Medicare supplement products. During 2Q13, we experienced a slight shift in the sale of Medicare supplement policies to the sale of Medicare Advantage policies. Medicare Advantage policies are sold through our agency force for other providers in exchange for marketing fees. Bankers Life has opened 9 new sales offices in the first six months of 2013, contributing to a 4 percent growth in agent count.

Pre-tax operating earnings in 2Q13 compared to 2Q12 were up $3.0 million, or 4 percent. Earnings in 2Q13 reflected stability in aggregate core benefit ratios and interest rate spreads, and continued growth in collected premiums.

Pre-tax operating earnings in 2Q13 of $79.1 million included: (i) approximately $6.5 million of favorable reserve developments in the Medicare supplement block; partially offset by (ii) refinements to the methodologies used to calculate health product reserves (primarily long-term care) of approximately $4.0 million.

Pre-tax operating earnings in 2Q12 of $76.1 million included earnings from premium adjustments on assumed reinsurance agreements with Coventry of $3.6 million.

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 2Q13 was $23.3 million, up 4 percent from 2Q12 due to increased sales of supplemental health products. Collected premiums, excluding premiums from the closed Medicare supplement block, were up 5 percent in 2Q13 compared to 2Q12, driven by strong sales and persistency.

Pre-tax operating earnings in 2Q13 compared to 2Q12 were down $2.1 million, or 6 percent.

Pre-tax operating earnings in 2Q13 of $31.8 million included approximately $1.5 million of favorable reserve developments in the Medicare supplement block.

Pre-tax operating earnings in 2Q12 benefited from favorable supplemental health benefit ratios.

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 2Q13 was $15.8 million, up 1 percent from 2Q12. These sales were in line with our expectations given our advertising spend this quarter.

The pre-tax operating earnings in 2Q13 compared to 2Q12 reflects a 7 percent growth in collected premiums.

The pre-tax operating earnings from this segment's in-force business increased 11 percent to $12.4 million in 2Q13 from 2Q12, reflecting growth in the block.

Recognizing the accounting standard related to deferred acquisition costs, the amount of our investment in new business during a particular period will have a significant impact on this segment's results. We continue to expect this segment to report an EBIT loss of between $5 million and $10 million in 2013.

Other CNO Business consists of blocks of various insurance products that are no longer being actively marketed.

Results in 2Q13 compared to 2Q12 were favorable by $.7 million.

The run-off nature of the business in this segment will often result in earnings that fluctuate between periods. We continue to expect this segment to report EBIT in the range of $5 million to $20 million for 2013.

Corporate Operations includes our investment advisory subsidiary and corporate expenses.

Results in 2Q13 compared to 2Q12 were favorable by $11.5 million primarily due to lower expenses and favorable investment income in this quarter. Results in 2Q13 reflected a reduction in expenses of $6 million related to the impact of higher interest rates on the values of liabilities for agent deferred compensation and former executive retirement annuities.

Non-Operating Items

Net realized investment gains in 2Q13 were $1.8 million (net of related amortization and taxes) including total other-than-temporary impairment losses of $.6 million recorded in earnings. Net realized investment gains in 2Q12 were $18.7 million (net of related amortization and taxes), including total other-than-temporary impairment losses of $3.5 million recorded in earnings.

During 2Q13 and 2Q12, we recognized an increase (decrease) in earnings of $12.1 million and $(6.9) million, respectively, resulting from changes in the estimated fair value of embedded derivative liabilities related to our fixed index annuities, net of related amortization and income taxes. Such amounts reflect the changes in market interest rates used to determine the derivative's estimated fair value.

The results for 2Q13 include a $6.8 million loss on extinguishment of debt, net of taxes, related to: (i) the amendment of the Senior Secured Credit Agreement and the write-off of unamortized discount and issuance costs associated with prepayments on the Senior Secured Credit Agreement; and (ii) the repurchase of 7.0% Debentures.

In 2Q13, we reduced the valuation allowance for deferred tax assets by $5.0 million resulting from the utilization of capital loss carryforwards during the period.

Book value per diluted share, excluding accumulated other comprehensive income (loss) (5), increased to $17.01 from $16.21 at December 31, 2012.

Statutory (based on non-GAAP measures) and GAAP Capital Information

Our consolidated statutory risk-based capital ratio was 376% at June 30, 2013, reflecting 2Q13 consolidated statutory operating earnings of $102.1 million and the payment of dividends to the holding company of $57.5 million during the quarter and $138.5 million year-to-date.

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