Profit Drops at CNO

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Carmel-based CNO Financial Group Inc. (NYSE: CNO) is reporting third quarter net income of $117.4 million, compared to $283 million in the same period year. Chief Executive Officer Ed Bonach says despite the decrease, the company is pleased with the sales performance of its Washington National and Colonial Penn segments. October 28, 2014

News Release

CARMEL, Ind. - CNO Financial Group, Inc. (NYSE: CNO) today announced third quarter of 2014 operating earnings (1) of $76.6 million, or 35 cents per diluted share, compared to $72.7 million, or 32 cents per diluted share, in the third quarter of 2013.

"The strength of our business franchise produced growth in sales, collected premiums, earnings and continued capital strength supporting further return of capital to shareholders in the quarter," said Ed Bonach, CEO of CNO. "While pleased with consistent sales growth at Washington National and continued strong recovery at Colonial Penn, we are taking steps to gain back sales momentum in our Bankers Life segment as we end 2014 and head into 2015."

Third Quarter 2014 Highlights

Sales, as defined by total new annualized premium ("NAP") (2): $103.8 million, up 2% from 3Q13

Collected premium from our continuing operating segments (3): $827.1 million up 2% from 3Q13

Net income per diluted share: 54 cents in 3Q14 (including 8 cents from the release of the valuation allowance for deferred taxes) compared to $1.23 in 3Q13 (including 90 cents from the release of the valuation allowance for deferred taxes and other tax items)

Net operating income (1) per diluted share: 35 cents in 3Q14 compared to 32 cents in 3Q13

Unrestricted cash and investments held by our holding company were $432 million at September 30, 2014, reflecting the proceeds from the sale of Conseco Life Insurance Company ("CLIC")

Securities repurchases, common stock dividends and debt payments were $189.4 million in 3Q14, including the repurchase of all outstanding warrants (equivalent to 3.3 million shares of common stock) for $57.4 million

Nine-month 2014 Highlights

Sales, as defined by total NAP (2): $310.6 million, up 3% from the first nine months of 2013

Collected premium from our continuing operating segments (3): $2,474.5 million up 2% from the first nine months of 2013

Net income (loss) per diluted share: (15) cents in the first nine months of 2014 (including $(1.26) from the net loss on the sale of CLIC and gain on reinsurance transactions) compared to $1.59 in the first nine months of 2013 (including 95 cents from the release of the valuation allowance for deferred taxes and other tax items)

Net operating income (1) per diluted share: 93 cents in the first nine months of 2014 compared to 78 cents in the first nine months of 2013

Consolidated risk-based capital ratio was estimated at 425% at September 30, 2014, reflecting statutory operating earnings of $285 million and net dividends to the holding company of $174 million during the first nine months of 2014

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 3Q14 was $61.8 million, down $.7 million from 3Q13. NAP for the nine months ended September 30, 2014, was $188.0 million, up 1 percent from the same period in 2013. Collected premiums were up 2 percent in 3Q14 compared to 3Q13, driven by increased sales over the last 12 months and favorable persistency. Annuity account values, on which spread income is earned, increased 2% to $7.5 billion in 3Q14 compared to 3Q13. Weakness in sales results were primarily driven by low levels of recruiting year-to-date which led to a 6% decrease in average agent count, partially offset by continued improvements in productivity. Full year 2014 sales growth is now expected to be in the 0% to 3% range.

Pre-tax operating earnings in 3Q14 compared to 3Q13 were up $25.5 million, or 30 percent. Earnings in 3Q14 reflect favorable annuity, Medicare supplement and long-term care margins.

Pre-tax operating earnings in 3Q14 of $111.8 million included: (i) $11.0 million of favorable reserve developments in the long-term care block, including $2.8 million of one-time catch-up reserve releases related to the use of a new process to identify changes in the status of our insureds in a more timely manner; and (ii) $2.5 million of favorable reserve developments in the Medicare supplement block.

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

Pre-tax operating earnings in 3Q14 included approximately $3 million of additional income (including the impact of favorable mortality of $.5 million) from the recapture of a block of life insurance business previously ceded to Wilton Reassurance Company ("Wilton Re"). This increase to pre-tax operating earnings was partially offset by approximately $2 million of overhead expenses that were previously allocated to the Other CNO Business segment in quarters prior to 2014 and have continued after the completion of the sale of CLIC.

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 3Q14 was $25.6 million, up 7 percent from 3Q13 driven by strong supplemental health sales in the individual market through Performance Matters Associates, our wholly-owned marketing organization. Collected premiums from the segment's supplemental health block were up 4 percent in 3Q14 compared to 3Q13, driven by strong sales and persistency.

Pre-tax operating earnings in 3Q14 compared to 3Q13 were down $5.4 million, or 16 percent, primarily resulting from elevated loss ratios in the supplemental health block.

Pre-tax operating earnings in 3Q14 of $27.6 million were reduced by $2.5 million of one-time catch-up premium refunds in the supplemental health insurance block related to the use of a new process to identify changes in the status of our insureds in a more timely manner. After adjusting for this significant item, the interest-adjusted benefit ratio for the supplemental health block was 54.9 percent, reflecting elevated claims in the quarter. We continue to expect that this block's interest-adjusted benefit ratio will be in the 54 percent range for the year.

Pre-tax operating earnings in 3Q14 also included approximately $2 million of overhead expenses that were previously allocated to the Other CNO Business segment in quarters prior to 2014 and have continued after the completion of the sale of CLIC.

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 3Q14 was $16.4 million, up 7 percent from 3Q13, reflecting increased sales of both graded benefit and simplified issue life insurance products, including an increase in sales through the internet. Collected premiums were up 6 percent in 3Q14 compared to 3Q13, driven by increased sales and steady persistency.

Pre-tax operating earnings in 3Q14 of $.4 million were up $4.6 million compared to 3Q13, reflecting continued growth in the in-force block, favorable policy benefits and a modest increase in the deferral of acquisition costs due to a slight shift to deferrable direct mail marketing activities. In-force EBIT was $14.9 million, up 16 percent from 3Q13, 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 expect this segment to report approximately break-even results in 2014.

Corporate Operations includes our investment advisory subsidiary a