CNO Financial Group Reports Fourth Quarter and Full Year 2014 Results

CARMEL, Ind., Feb. 10, 2015 /PRNewswire/ -- CNO Financial Group, Inc. (NYSE: CNO) today announced fourth quarter of 2014 operating earnings (1) of $59.3 million, or 29 cents per diluted share, compared to $66.2 million, or 29 cents per diluted share, in the fourth quarter of 2013.  For the full year 2014, CNO reported operating earnings (1) of $259.5 million, or $1.19 per diluted share, compared to $248.4 million, or $1.07 per diluted share in 2013. Net income and operating earnings in the fourth quarter of 2014 reflect an unfavorable $9.8 million (5 cents per diluted share) after-tax mark-to-market change in the agent deferred compensation plan liability which was impacted by the use of a new mortality table and the low interest rate environment.  We have elected to recognize the mark-to-market change in the estimated value of this liability through earnings as assumptions change.

"We continued to profitably grow the enterprise in the fourth quarter, along with advancing Bankers Life agent recruiting," said Ed Bonach, CEO of CNO.  "For the year, we made important progress on several fronts, in particular further reducing risk with the sale of CLIC, returning capital to shareholders, investing in our franchise, and growing our core businesses with increases in sales, collected premiums, annuity account values and operating earnings."

Strategic Technology Partnership

CNO has entered into a comprehensive agreement with Cognizant forming a strategic partnership for technology delivery that is expected to accelerate our core IT process improvements and enable more rapid innovation.  Under the agreement, Cognizant will, after the transition period, assume CNO's application development, maintenance, and testing functions as well as select IT infrastructure operations.  Cognizant will also take over all CNO operations located in Hyderabad, India.  The partnership will result in the movement of approximately 640 IT positions from CNO to Cognizant, roughly 240 of which are U.S.-based.  The agreement is expected to deliver run-rate expense savings of approximately $10 million annually and to result in a modest charge to earnings of approximately $6 million over the first two quarters of 2015 related to certain one-time transition costs.

Commenting on the strategic partnership, CEO Ed Bonach said, "We are pleased to launch an agreement with Cognizant, a leading provider of information technology and related services to the insurance industry.  This partnership is critical to advancing our technology platforms, enhancing our agent and customer experience, and positioning us through innovation and efficiency to better compete in the underserved middle-market."

Fourth Quarter 2014 Highlights

• Sales, as defined by total new annualized premium ("NAP") (2): $114.8 million, up 1% from 4Q13
• Collected premium from our continuing operating segments (3): $884.4 million up 3% from 4Q13
• Net income per diluted share: 41 cents in 4Q14 compared to 47 cents in 4Q13
• Net operating income (1) per diluted share: 29 cents in both 4Q14 and 4Q13 (including (5) cents in 4Q14 for the mark-to-market change in the agent deferred compensation plan liability)
• Completed comprehensive annual review of actuarial assumptions, resulting in a net $4 million unfavorable pre-tax impact
• Unrestricted cash and investments held by our holding company were $345 million at December 31, 2014
• Common stock repurchases, dividends and debt payments were $111.5 million in 4Q14

Full Year 2014 Highlights

• Sales, as defined by total NAP (2): $425.4 million, up 2% from 2013
• Collected premium from our continuing operating segments (3): $3,358.9 million up 2% from 2013
• Net income per diluted share: 24 cents in 2014 (including $(1.24) from the net loss on the sale of Conseco Life Insurance Company ("CLIC") and gain on reinsurance transactions) compared to $2.06 in 2013 (including $1.29 from the release of the valuation allowance for deferred taxes and other tax items)
• Net operating income (1) per diluted share: $1.19 in 2014 compared to $1.07 in 2013
• Consolidated risk-based capital ratio was approximately 434% at December 31, 2014 compared to 410% at December 31, 2013
• Statutory operating earnings in 2014 were $393 million and net insurance company dividends to the holding company were $174 million
• Capital returned to shareholders in 2014 totaled $427 million, including securities repurchases of $376 million and common stock dividends of $51 million

Quarterly Segment Operating Results

The following table summarizes the financial impact of significant items on our 4Q14 net operating income (dollars in millions, except per share amounts):

The significant items in 4Q14 included: (i) adjustments arising from our comprehensive annual actuarial review of assumptions including $6 million of favorable impacts in the Bankers Life segment and $10 million of unfavorable impacts in the Washington National segment; (ii) the receipt of a $3 million settlement in the Bankers Life segment related to the early termination in 2013 of a PDP quota-share agreement; and (iii) an increase in expenses of $15 million in the Corporate Operations segment for the mark-to-market change in the agent deferred compensation plan liability.

*  See page 12 for the table of Net Operating Income Excluding Significant Items for the three months ended December 31, 2013.

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 4Q14 was $73.6 million, flat with 4Q13.  NAP for the year ended December 31, 2014, was $261.6 million, up 1 percent from 2013.  Collected premiums were up 3 percent in 4Q14 compared to 4Q13, driven by sales over the last 12 months and favorable persistency.  Annuity account values, on which spread income is earned, increased 2 percent to $7.4 billion in 4Q14 compared to 4Q13.  Sales results for the quarter and year were impacted by a 3 percent decrease in average producing agent count in 2014.  However, the average producing agent count increased in 4Q14 compared to 3Q14, reflecting improved recruiting in 4Q14.  We anticipate this segment's sales will grow 3 to 5 percent in 2015.

Pre-tax operating earnings in 4Q14 compared to 4Q13 were up $20.5 million, or 25 percent.  Earnings in 4Q14 reflect the significant items described below and favorable margins from our annuity block reflecting growth from sales, higher account values and lower surrenders.

Pre-tax operating earnings in 4Q14 of $103.5 million included significant items of $9 million, comprised of: (i) $6 million of positive impacts from our comprehensive annual actuarial review including impacts from model enhancements, net of changes in assumptions related to mortality and long-term interest rates; and (ii) the receipt of a $3 million settlement related to the early termination in 2013 of a PDP quota-share agreement.

Pre-tax operating earnings in 4Q13 of $83.0 million included significant items of $3.2 million, including $5.8 million of favorable reserve developments in the Medicare supplement block, net of $2.6 million of net unfavorable adjustments primarily related to reserves established for remediation efforts.

Pre-tax operating earnings in 4Q14 included approximately $2.5 million of additional income from the recapture (completed in 3Q14) 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 4Q14 was $26.3 million, flat with 4Q13.  NAP for the year ended December 31, 2014, was $99.2 million, up 6 percent from 2013.  Collected premiums from the segment's supplemental health block were up 5 percent in 4Q14 compared to 4Q13, driven by strong sales and persistency.  We anticipate this segment's sales will grow 5 to 7 percent in 2015.

Pre-tax operating earnings in 4Q14 compared to 4Q13 were down $17.6 million, primarily resulting from adjustments from our comprehensive annual actuarial review described below and the favorable interest-adjusted benefit ratio on the supplemental health insurance block in 4Q13.

Pre-tax operating earnings in 4Q14 of $20.2 million were reduced by $10 million primarily related to the impact of loss recognition on a closed block of payout annuities resulting from changes in assumptions related to long-term interest rates and mortality experience.

Pre-tax operating earnings in 4Q14 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 4Q14 was $14.9 million, up 6 percent from 4Q13, reflecting increased sales of both graded benefit and simplified issue life insurance products, including an increase in sales through the internet.  NAP for the year ended December 31, 2014, was $64.6 million, up 4 percent from 2013.  Collected premiums were up 5 percent in 4Q14 compared to 4Q13, driven by increased sales and steady persistency.  We anticipate this segment's sales will grow 6 to 8 percent in 2015.

Pre-tax operating earnings in 4Q14 of $2.8 million were up $6.9 million compared to 4Q13, reflecting continued growth in the in-force block, marketing cost effectiveness and a modest increase in the deferral of acquisition costs due to a slight shift to deferrable direct response advertising activities, partially offset by favorable mortality experienced in 4Q13.  In-force EBIT was $11.3 million, down 7 percent from 4Q13, reflecting the favorable mortality experienced in 4Q13.  Full year 2014 in-force EBIT was $49.6 million, up 7 percent from 2013, primarily 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 expect this segment to report slightly positive earnings in 2015, but because of the seasonality of advertising spend, we expect a loss in the $7 million range in 1Q15.

Corporate Operations includes our investment advisory subsidiary and corporate expenses.

This segment's earnings included less favorable investment returns in 4Q14 compared to the strong investment returns in 4Q13.  Pre-tax operating earnings in 4Q14 also reflected an increase in expenses of $15 million for the mark-to-market change in the agent deferred compensation plan liability which was impacted by the use of a new mortality table and the low interest rate environment.  We have elected to recognize the mark-to-market change in the estimated value of this liability through earnings as assumptions change.

Non-Operating Items Related to the Sale of CLIC

On July 1, 2014, we completed the previously announced sale of CLIC to Wilton Re.  In 1Q14, we recognized an estimated loss on the CLIC transaction of $298 million, net of income taxes.  In 3Q14 and 4Q14, we recognized a reduction to the loss on the sale of CLIC of $6.0 million and $2.9 million, respectively, to reflect the determination of the final sales price and net proceeds.

The earnings related to the CLIC business prior to being sold are also reflected as non-operating items.  Such earnings, net of taxes, were $9.7 million in 4Q13.

Other Non-Operating Items

Net realized investment losses in 4Q14 were $2.3 million (net of related amortization and taxes) including total other-than-temporary impairment losses of $12.6 million recorded in earnings.  Net realized investment gains in 4Q13 were $9.1 million (net of related amortization and taxes) including total other-than-temporary impairment losses of $7.5 million recorded in earnings.

During 4Q14 and 4Q13, we recognized an increase (decrease) in earnings of ($11.4) million and $7.4 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 amount includes the impacts of changes in market interest rates used to determine the derivative's estimated fair value.

In 4Q14, we reduced the valuation allowance for deferred tax assets by $34.1 million primarily related to higher actual non-life income, including the impacts of tax audit adjustments.

In 4Q13, we reduced the valuation allowance for deferred tax assets by $17.6 million primarily resulting from the impact of our higher levels of income on projected future taxable income used to determine recoverable net operating loss and capital loss carryforwards.

In addition, tax items in 4Q13 reflected: (i) a $64.7 million net reduction in the deferred tax valuation allowance resulting from the completion of certain investment trading strategies resulting in the utilization of capital loss carryforwards; (ii) an increase of $2.0 million to the deferred tax valuation allowance due to the impact of the loss recognized on a reinsurance transaction, net of projected increases to future taxable income; and (iii) several other tax items resulting in a net unfavorable impact of $1.0 million.

In 4Q13, two of our insurance subsidiaries with long-term care business in the Other CNO Business segment entered into 100% coinsurance agreements which ceded $550 million of closed block long-term care reserves to an unaffiliated reinsurer.  We recognized a loss on the transaction of $63.3 million, net of income taxes, in 4Q13.

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

Our consolidated statutory risk-based capital ratio was approximately 434% at December 31, 2014, reflecting 4Q14 and full year 2014 consolidated statutory operating earnings of $108 million and $393 million, respectively, and the payment of net insurance company dividends to the holding company of $174 million during the year.  In 4Q14, our insurance subsidiaries did not pay dividends to the holding company which contributed to an increase in Bankers Life's risk-based capital ratio to approximately 411% at December 31, 2014.

During the fourth quarter of 2014, we repurchased $75.0 million of common stock under our securities repurchase program.  We repurchased 4.4 million common shares at an average cost of $17.16 per share.  Total securities repurchased in 2014 totaled $376.5 million.  CNO anticipates repurchasing common stock in the range of $250 million to $325 million in 2015, absent compelling alternatives.  As of December 31, 2014, we had 203.3 million shares outstanding and had authority to repurchase up to an additional $420.9 million of our common stock.  During 4Q14, we also paid common stock dividends of $12.2 million.

Book value per diluted share, excluding accumulated other comprehensive income (loss) (6), increased to $18.75 at December 31, 2014, compared to $18.62 at December 31, 2013.

Our debt-to-total capital ratio, excluding accumulated other comprehensive income (4) at December 31, 2014, was 17.1 percent, an increase of 20 basis points from December 31, 2013, reflecting the decrease to capital from the loss recognized on the sale of CLIC and debt repayments of $63.1 million.  Unrestricted cash and investments held by our holding company were $345 million at December 31, 2014, compared to $309 million at December 31, 2013, reflecting the proceeds from the sale of CLIC, partially offset by common stock and equivalent repurchases and dividend and debt payments.

Earnings and Outlook Conference Call

The Company will host a conference call at 11:00 a.m. (EST) on Wednesday, February 11, 2015 to discuss fourth quarter 2014 results and provide the outlook for 2015 sales, select financial metrics and excess capital deployment plans.  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.

About CNO Financial Group

CNO Financial Group, Inc. (NYSE: CNO) is a holding company.  Our insurance subsidiaries - principally Bankers Life and Casualty Company, Colonial Penn Life Insurance Company and Washington National Insurance Company - primarily serve middle-income 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.

- Tables Follow -

*   This table summarizes the financial impacts of significant items (as described in the segment results section of this press release) on our 4Q13 net operating income.

Cautionary Statement Regarding Forward-Looking Statements.  Our statements, trend analyses and other information contained in this press release relative to markets for CNO Financial's products and trends in CNO Financial'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. 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: (i) 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; (ii) 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; (iii) general economic, market and political conditions, including the performance and fluctuations 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; (iv) the ultimate outcome of lawsuits filed against us and other legal and regulatory proceedings to which we are subject; (v) our ability to make anticipated changes to certain non-guaranteed elements of our life insurance products; (vi) our ability to obtain adequate and timely rate increases on our health products, including our long-term care business; (vii) the receipt of any required regulatory approvals for dividend and surplus debenture interest payments from our insurance subsidiaries; (viii) 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; (ix) changes in our assumptions related to deferred acquisition costs or the present value of future profits; (x) the recoverability of our deferred tax assets and the effect of potential ownership changes and tax rate changes on their value; (xi) our assumption that the positions we take on our tax return filings will not be successfully challenged by the Internal Revenue Service; (xii) changes in accounting principles and the interpretation thereof; (xiii) our ability to continue to satisfy the financial ratio and balance requirements and other covenants of our debt agreements; (xiv) 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, (xv) performance and valuation of our investments, including the impact of realized losses (including other-than-temporary impairment charges); (xvi) 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; (xvii) our ability to generate sufficient liquidity to meet our debt service obligations and other cash needs; (xviii) our ability to maintain effective controls over financial reporting; (xix) our ability to continue to recruit and retain productive agents and distribution partners and customer response to new products, distribution channels and marketing initiatives; (xx) our ability to achieve additional upgrades of the  financial strength ratings of CNO Financial 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; (xxi) 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; (xxii) 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; (xxiii) availability and effectiveness of reinsurance arrangements, as well as any defaults or failure of reinsurers to perform; (xxiv) the performance of third party service providers and potential difficulties arising from outsourcing arrangements; (xxv) the growth rate of sales, collected premiums, annuity deposits and assets; (xxvi) interruption in telecommunication, information technology or other operational systems or failure to maintain the security, confidentiality or privacy of sensitive data on such systems; (xxvii) events of terrorism, cyber attacks, natural disasters or other catastrophic events, including losses from a disease pandemic; (xxviii) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; and (xxix) the risk factors or uncertainties listed from time to time in our filings with the Securities and Exchange Commission.  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 forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements.  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.         

SOURCE CNO Financial Group, Inc.