CNO Posts Big Profit Jump

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Carmel-based CNO Financial Group Inc. (NYSE: CNO) is reporting a third quarter profit of $283 million, compared to a loss of $5 million during the same quarter the previous year. The company says net income was "significantly impacted" by favorable tax items.

October 28, 2013

News Release

Carmel, Ind. -- CNO Financial Group, Inc. (NYSE: CNO) today announced third quarter of 2013 net income of $283.0 million, or $1.23 per diluted share, and operating earnings (1) of $77.2 million, or 33 cents per diluted share. Third quarter net income was significantly impacted by various favorable tax items.

"Our solid, positive momentum continues at CNO, with our core businesses producing growth in sales, collected premium and operating earnings per share," CEO Ed Bonach said. "Investments in our business model and focusing on execution continue to result in profitable growth, increased efficiencies and capital generation. These strong business fundamentals, substantial cash flow and effective capital deployment continue to deliver shareholder value."

Third Quarter 2013 Highlights

•Sales, as defined by total new annualized premium ("NAP") (2): $101.8 million, up 8% from 3Q12

•Collected premium from our core operating segments (Bankers Life, Washington National and Colonial Penn): $809.6 million up 4% from 3Q12

•Net income (loss) per diluted share: $1.23 compared to $(.02) in 3Q12

•Net operating income (1) per diluted share: 33 cents compared to 11 cents in 3Q12

•Net income was impacted by various favorable tax items totaling $206.7 million in 3Q13 and $143.0 million in 3Q12

•Unrestricted cash and investments held by our holding company were $292 million at September 30, 2013

Nine-month 2013 Highlights

•Sales, as defined by total NAP (2): $302.2 million, up 5% from the first nine months of 2012

•Net income per diluted share of $1.59 compared to 45 cents in the first nine months of 2012

•Net operating income (1) per diluted share: 83 cents compared to 45 cents in the first nine months of 2012

•The consolidated statutory risk-based capital ratio increased 25 percentage points to 392% during the first nine months of 2013, reflecting statutory operating earnings of $296 million and dividend payments to the holding company of $202.5 million

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 3Q13 was $62.5 million, up 9 percent from 3Q12 with higher sales of life and supplemental health products being offset by lower sales of long-term care and Medicare supplement products. Sales of Medicare Advantage policies continued to grow, driving fee income of $2.9 million in 3Q13 compared to $1.8 million in 3Q12. Medicare Advantage policies are sold through our agency force for other providers in exchange for marketing fees. Bankers Life has opened 19 new sales offices in the first nine months of 2013, contributing to a 4 percent growth in average agent count.

Pre-tax operating earnings in 3Q13 compared to 3Q12 were up $5.7 million, or 7 percent. Earnings in 3Q13 reflected favorable reserve developments in the Medicare supplement block and increased earnings from our annuity business reflecting higher account values and low surrenders, partially offset by higher benefit ratios in the long-term care block due to higher persistency.

Pre-tax operating earnings in 3Q13 of $86.3 million included $5.7 million of favorable reserve developments in the Medicare supplement block.

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 3Q13 was $23.9 million, up 12 percent from 3Q12 due to increased sales of supplemental health products stemming from agent recruiting and geographic expansion. Collected premiums, excluding premiums from the closed Medicare supplement block, were up 7 percent in 3Q13 compared to 3Q12, driven by strong sales and persistency.

Pre-tax operating earnings in 3Q13 compared to 3Q12 were down $5.8 million, or 17 percent. Third quarter results primarily reflect higher benefit ratios in the supplemental health insurance block due to decreased conversion and upgrade activity for certain policies approaching their return of premium maturity date. In addition, the 3Q12 benefit ratio reflected favorable claim experience.

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 3Q13 was $15.4 million, up 2 percent from 3Q12. These sales were in line with our expectations given the amount and timing of our advertising spend this quarter. Collected premiums were up 8 percent in 3Q13 compared to 3Q12, driven by growth in the block.

Pre-tax operating earnings in 3Q13 reflected higher marketing expenses as compared to 3Q12. In-force EBIT was $12.9 million, up 11 percent from 3Q12, reflecting the 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 3Q13 reflected favorable mortality in this segment's life block and favorable claim experience in this segment's long-term care block.

Results in 3Q12 reflected: (i) a reduction in earnings of approximately $43 million primarily due to the impact of decreased projected future investment yield assumptions related to interest-sensitive insurance products; (ii) 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; and (iii) favorable mortality experience in this segment's life block.

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 3Q13 reflect the impact of higher interest rates on the values of liabilities for agent deferred compensation and former executive retirement annuities and favorable investment results.

Net expenses in 3Q13 were decreased by $9.8 million related to the impact of higher interest rates on the values of liabilities for agent deferred compensation and former executive retirement annuities, compared to an increase in expenses of $10 million in 3Q12 related to the impact of lower interest rates on the values of such liabilities.

Non-Operating Items

Net realized investment losses in 3Q13 were $.1 million (net of related amortization and taxes) including total other-than-temporary impairment losses of $2.9 million recorded in earnings. 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.

During 3Q13 and 3Q12, we recognized an increase (decrease) in earnings of $2.2 million and $(2.0) million, respectively, resulting from changes in the estimated fair value of embedded derivative liabilities related to our fixed index annuitie