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Conseco Reports Third Quarter Results
CARMEL, Ind., Oct. 31 /PRNewswire-FirstCall/ -- Conseco, Inc. (NYSE:
CNO) today reported results for the third quarter of 2007.
"Third Quarter results reflect a number of significant events, as
progress on our program to position Conseco for future profitability and
growth is increasingly evident," CEO Jim Prieur said. "We saw continued
strong growth in both our Bankers Life and Colonial Penn businesses, while
Conseco Insurance Group, even with a decline in sales during the quarter,
produced new business expected to be more profitable. Importantly,
continued progress also was evident on the turnaround in our run-off
long-term care block, with our claims reserve volatility reduced this
quarter following the reserve strengthening of the previous quarter. With
only a small loss in the quarter, we are on target for that block to become
profitable next year."
"The majority of our organizational realignment is now complete as
well, with all of our customer service calls now being handled in our
Carmel, Indiana offices," Prieur said.
"Our just announced agreement in which we will invest $63 million to
recapture a block of Colonial Penn life insurance business comprising
approximately $50 million annual premium that had been ceded in 2002 to a
subsidiary of Swiss Re, is a significant investment in the growth of this
high-return core business," said Chief Financial Officer Ed Bonach. "This
transaction is expected to be immediately accretive to earnings and return
on equity. Our October 12, 2007, announcement that we completed the 100%
coinsurance of an older block of fixed and equity-indexed annuities is
another important step in improving Conseco's performance."
"Conseco also further executed on its share repurchase program in the
third quarter," Bonach said, "with the purchase of 2.4 million shares at an
average price of $14.22 per share, for a total of $34.7 million."
Third quarter 2007 results:
-- Net operating income (loss) (1): $(25.6) million, compared to $52.8
million in 3Q06
-- Net operating income (loss) per diluted share: (14) cents, compared to
35 cents in 3Q06
-- Net income (loss) applicable to common stock: $(53.7) million,
compared to $38.9 million in 3Q06 (including $28.1 million of net
realized investment losses in 3Q07 vs. $13.9 million of net realized
investment losses in 3Q06)
-- Net income (loss) per diluted share: (29) cents, compared to 26 cents
in 3Q06 (including 15 cents of net realized investment losses in 3Q07
vs. 9 cents of net realized investment losses in 3Q06)
-- Income (loss) before net realized investment losses, corporate interest
and taxes ("EBIT") (2): $(23.4) million, compared to $110.4 million in
3Q06
-- Sales (3): $86.0 million, down 7% from 3Q06
Nine-month 2007 results:
-- Net operating income (loss) (1): $(65.4) million, compared to $76.9
million in the first nine months of 2006
-- Net operating income (loss) per diluted share: (39) cents, compared to
50 cents in the first nine months of 2006
-- Net income (loss) applicable to common stock: $(117.3) million,
compared to $62.2 million in the first nine months of 2006
-- Net income (loss) per diluted share: (69) cents, compared to 41 cents
in the first nine months of 2006
-- EBIT (2): $(30.3) million, compared to $202.3 million in the first
nine months of 2006
-- Sales (4): $328.2 million, up 5% over the first nine months of 2006
Financial strength at September 30, 2007:
-- Book value per common share, excluding accumulated other comprehensive
income (loss) (4), was $24.79, compared to $27.06 at December 31, 2006
-- Book value per diluted share, excluding accumulated other comprehensive
income (loss) (4), was $24.77, compared to $25.64 at December 31, 2006
-- Debt-to-total capital ratio, excluding accumulated other comprehensive
income (loss) (4), was 20.6%, compared to 17.3% at December 31, 2006
Operating results
Our segments reflect the addition of Colonial Penn as a separate
segment. All prior period segment disclosures have been restated to conform
to our new presentation. Results by segment for the quarter were as follows
($ in millions, except per share data):
Three Months Ended
September 30,
2007 2006
EBIT (2), excluding costs related to a
litigation settlement and loss related
to a coinsurance transaction:
Bankers Life $ 66.3 $ 68.4
Conseco Insurance Group (.4) 58.5
Colonial Penn. 7.0 4.6
Other Business in Run-off (2.9) (13.0)
Corporate Operations, excluding corporate
interest expense (.5) (8.1)
EBIT, excluding costs related to a
litigation settlement and loss related to a
coinsurance transaction 69.5 110.4
Costs related to a litigation settlement (16.4) -
Loss related to a coinsurance transaction (76.5) -
Total EBIT (23.4) 110.4
Corporate interest expense (20.2) (12.5)
Income (loss) before net realized
investment losses and taxes (43.6) 97.9
Tax expense (benefit) (18.0) 35.6
Net income (loss) before net realized
investment losses (25.6) 62.3
Preferred stock dividends:
5.50% Class B mandatorily convertible
preferred stock - (9.5)
Net operating income (loss) (25.6) 52.8
Net realized investment losses, net of
related amortization and taxes (28.1) (13.9)
Net income (loss) applicable to common stock $(53.7) $ 38.9
Per diluted share:
Net operating income (loss) $ (.14) $ .35
Net realized investment losses, net of
related amortization and taxes (.15) (.09)
Net income (loss) applicable to common stock $ (.29) $ .26
In our Bankers Life segment, pre-tax operating earnings were $66.3
million in the third quarter of 2007, compared to $68.4 million in the
third quarter of 2006. The slight decrease in earnings is driven by lower
margins in our long-term care business, partially offset by improved
spreads in our life and annuity business and higher income from our
marketing and quota-share agreements with Coventry Health Care.
In our Conseco Insurance Group segment, pre-tax operating loss was $0.4
million in the third quarter of 2007, compared to earnings of $58.5 million
in the third quarter of 2006. Significant factors affecting the segment's
earnings in these periods included:
-- An $11 million reduction in universal life earnings in the third
quarter of 2007. This block has experienced adverse mortality and we
are projecting break-even earnings in the future.
-- An $18.3 million out-of-period reduction in specified disease earnings
identified by our material control weakness remediation procedures.
-- An $11 million reduction in earnings for charges related to operational
initiatives and consolidation activities.
Our Colonial Penn segment achieved pre-tax operating earnings of $7.0
million in the third quarter of 2007, compared to $4.6 million in the third
quarter of 2006.
In our Other Business in Run-off segment, we recognized a pre-tax
operating loss of $2.9 million in the third quarter of 2007, compared to a
loss of $13 million in the third quarter of 2006. Results in the third
quarter of 2007 were positively impacted by a net $6.6 million reserve
reduction (reflecting an out-of-period release of active life reserves of
$20.1 million identified by remediation procedures and $13.5 million
reserve increase due to changes to certain actuarial estimates).
The Corporate Operations segment includes our investment advisory
subsidiary and corporate expenses.
Net realized losses of $28.1 million (net of taxes) in the third
quarter of 2007 consisted of losses from market value declines on the
assets transferred pursuant to our 100% annuity coinsurance transaction,
and from sales of mortgage-backed securities collateralized by sub-prime
residential mortgage loans. In the third quarter of 2007, we recorded a
charge of approximately $76.5 million related to the coinsurance
transaction. The results from the third quarter of 2007 reflect additional
pre-tax costs of $16.4 million related to the litigation settlement we
entered into in the second quarter of 2006.
Sales results
In addition to the sales of proprietary products, Bankers Life, through
a partnership with Coventry, distributes risk-share Medicare PDP and
private- fee-for-service plan (PFFS) through their career agents.
At Bankers Life (career distribution), total sales in 3Q07 were $56.5
million, down 2% from 3Q06. Bankers' sales were up 11% for the first nine
months of 2007.
At Conseco Insurance Group (independent distribution), total sales,
including sales of PDP through Coventry, in 3Q07 were $18.1 million, down
31% from 3Q06, with strong gains in specified disease sales offset by
decreases in Medicare supplement and annuities.
At Colonial Penn (direct distribution), total 3Q07 sales were $11.4
million, up 38% over 3Q06 as we continue to benefit from our investment in
marketing.
Conference Call
The company will host a conference call to discuss results at 10:00
a.m. Eastern Daylight Time on November 1, 2007. The webcast can be accessed
through the Investors section of the company's website as follows:
http://investor.conseco.com. Listeners 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 Thursday morning through the investors section of the
company's website.
About Conseco
Conseco, Inc.'s insurance companies help protect working American
families and seniors from financial adversity: Medicare supplement,
long-term care, cancer, heart/stroke and accident policies protect people
against major unplanned expenses; annuities and life insurance products
help people plan for their financial futures. For more information, visit
Conseco's web site at www.conseco.com.
(1) Management believes that an analysis of Net Income (Loss)
applicable to common stock before net realized investment gains or losses,
net of related amortization and income taxes, ("Net Operating Income," a
non-GAAP financial measure) is important to evaluate the financial
performance of the company, and is a key measure commonly used in the life
insurance industry. Management uses this measure to evaluate performance
because realized investment gains or losses can be affected by events that
are unrelated to the company's underlying fundamentals. A reconciliation of
Net Operating Income to Net Income applicable to common stock is provided
in the tables on page 2 and 8. Additional information concerning this
non-GAAP measure is included in our periodic filings with the Securities
and Exchange Commission that are available in the "Investor - SEC Filings"
section of Conseco's website, www.conseco.com.
(2) Management believes that an analysis of earnings or loss before net
realized investment gains (losses), corporate interest and taxes ("EBIT," a
non-GAAP financial measure) provides a clearer comparison of the operating
results of the company quarter-over-quarter because it excludes: (i)
corporate interest expense; and (ii) net realized investment gains (losses)
that are unrelated to the company's underlying fundamentals. A
reconciliation of EBIT to Net Income applicable to common stock is provided
in the tables on page 2 and 8.
(3) Measured by new annualized premium, which includes 6% of annuity
and 10% of single premium whole life deposits and 100% of all other
premiums, PDP sales equal $310 per enrolled policy, PFFS sales equal $2,100
per enrolled policy.
(4) The calculation of this non-GAAP measure differs from the
corresponding GAAP measure because accumulated other comprehensive income
(loss) has been excluded from the value of capital used to determine this
measure. Management believes this non-GAAP measure is useful because it
removes the volatility that arises from changes in the unrealized
appreciation (depreciation) of our investments. The corresponding GAAP
measures for debt- to-total capital and book value per common share were
21.7% and $23.10, respectively, at September 30, 2007, and 17.5% and
$26.58, respectively, at December 31, 2006.
Cautionary Statement Regarding Forward-Looking Statements. Our
statements, trend analyses and other information contained in this press
release relative to markets for Conseco's products and trends in Conseco'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" 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) our ability to obtain adequate and timely rate increases on our
supplemental health products including our long-term care business; (ii)
mortality, morbidity, 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; (iii) changes in our
assumptions related to the cost of policies produced or the value of
policies inforce at the Effective Date; (iv) 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; (v) performance of our investments;
(vi) 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; (vii) the
ultimate outcome of lawsuits filed against us and other legal and
regulatory proceedings to which we are subject; (viii) our ability to
remediate the material weakness in internal controls over the actuarial
reporting process that we identified at year-end 2006 and to maintain
effective controls over financial reporting; (ix) our ability to continue
to recruit and retain productive agents and distribution partners and
customer response to new products, distribution channels and marketing
initiatives; (x) our ability to achieve an upgrade of the financial
strength ratings of our insurance company subsidiaries as well as the
potential impact of rating downgrades on our business; (xi) the risk
factors or uncertainties listed from time to time in our filings with the
Securities and Exchange Commission; (xii) regulatory changes or actions,
including those relating to regulation of the financial affairs of our
insurance companies, such as the payment of dividends to us, regulation of
financial services affecting (among other things) bank sales and
underwriting of insurance products, regulation of the sale, underwriting
and pricing of products, and health care regulation affecting health
insurance products; (xiii) general economic conditions and other factors,
including prevailing interest rate levels, stock and credit market
performance and health care inflation, which may affect (among other
things) our ability to sell products and access capital on acceptable
terms, the returns on and the market value of our investments, and the
lapse rate and profitability of policies; and (xiv) changes in the Federal
income tax laws and regulations which may affect or eliminate the relative
tax advantages of some of our products.
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 written
or oral forward-looking statements attributable to us are expressly
qualified in their entirety by the foregoing cautionary statement. 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.
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
September 30, December 31,
2007 2006
(unaudited)
ASSETS
Investments:
Actively managed fixed maturities
at fair value (amortized cost:
September 30, 2007 - $21,073.6;
December 31, 2006 - $22,946.9) $20,511.7 $22,802.9
Investments to be transferred
pursuant to annuity coinsurance
transaction 2,585.1 -
Equity securities at fair value
(cost: September 30, 2007 - $34.3;
December 31, 2006 - $23.9) 35.5 24.8
Mortgage loans 1,914.3 1,642.2
Policy loans 368.5 412.5
Trading securities 691.2 675.2
Other invested assets 180.5 178.8
Total investments 26,286.8 25,736.4
Cash and cash equivalents:
Unrestricted 392.3 385.9
Restricted 25.8 24.0
Accrued investment income 346.3 344.5
Value of policies inforce at the
Effective Date 1,740.2 2,137.2
Cost of policies produced 1,359.4 1,106.7
Reinsurance receivables 3,666.2 850.8
Income tax assets, net 1,992.3 1,786.9
Assets held in separate accounts 28.3 28.9
Other assets 324.0 316.0
Total assets $36,161.6 $32,717.3
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Liabilities for insurance products:
Interest-sensitive products $13,214.0 $13,018.0
Traditional products 12,445.1 12,094.1
Claims payable and other policyholder
funds 901.4 832.3
Liabilities related to separate accounts 28.3 28.9
Liability for assets to be transferred
pursuant to annuity coinsurance transaction 2,594.1 -
Other liabilities 565.6 611.8
Investment borrowings 913.7 418.3
Notes payable - direct corporate
obligations 1,195.7 1,000.8
Total liabilities 31,857.9 28,004.2
Commitments and Contingencies
Shareholders' equity:
Preferred stock - 667.8
Common stock ($0.01 par value,
8,000,000,000 shares authorized,
shares issued and outstanding:
September 30, 2007 - 186,345,515;
December 31, 2006 - 152,165,108) 1.9 1.5
Additional paid-in capital 4,094.6 3,473.2
Accumulated other comprehensive loss (316.0) (72.6)
Retained earnings 523.2 643.2
Total shareholders' equity 4,303.7 4,713.1
Total liabilities and shareholders' equity $36,161.6 $32,717.3
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions, except per share data)
Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
Revenues:
Insurance policy income $ 822.0 $ 748.5 $2,352.6 $2,242.9
Net investment income:
General account assets 392.6 360.6 1,152.7 1,069.2
Policyholder and
reinsurer accounts
and other
special-purpose
portfolios 3.2 26.2 50.4 26.6
Net realized investment
losses (51.1) (21.8) (114.3) (28.6)
Fee revenue and other
income 8.5 4.8 17.5 14.0
Total revenues 1,175.2 1,118.3 3,458.9 3,324.1
Benefits and expenses:
Insurance policy benefits 888.8 772.6 2,621.0 2,204.6
Interest expense 33.3 17.8 84.8 51.3
Amortization 93.3 104.2 325.8 320.4
Costs related to a
litigation settlement 16.4 - 64.4 174.7
Loss related to
coinsurance
transaction 76.5 - 76.5 -
Other operating costs
and expenses 153.7 147.0 449.7 430.2
Total benefits and
expenses 1,262.0 1,041.6 3,622.2 3,181.2
Income (loss) before
income taxes (86.8) 76.7 (163.3) 142.9
Income tax expense
(benefit) on
period income (33.1) 28.3 (60.1) 52.2
Net income (loss) (53.7) 48.4 (103.2) 90.7
Preferred stock
dividends - 9.5 14.1 28.5
Net income (loss)
applicable to
common stock $ (53.7) $ 38.9 $ (117.3) $ 62.2
Earnings per common
share:
Basic:
Weighted average
shares outstanding 187,733,000 151,663,000 169,270,000 151,566,000
Net income (loss) $ (.29) $ .26 $ (.69) $ .41
Diluted:
Weighted average
shares outstanding 187,733,000 152,529,000 169,270,000 152,547,000
Net income (loss) $ (.29) $ .26 $ (.69) $ .41
CONSECO, INC. AND SUBSIDIARIES
OPERATING RESULTS
Results by segment for the nine months ended September 30 were as
follows ($ in millions):
Nine Months Ended
September 30,
2007 2006
EBIT (2), excluding costs related to a
litigation settlement and loss related
to a coinsurance transaction:
Bankers Life $ 174.6 $ 189.3
Conseco Insurance Group 101.4 173.9
Colonial Penn 18.3 16.2
Other Business in Run-off (167.0) 15.4
Corporate Operations, excluding corporate
interest expense (16.7) (17.8)
EBIT, excluding costs related to a
litigation settlement and a loss related
to a coinsurance transaction 110.6 377.0
Costs related to the proposed litigation settlement (64.4) (174.7)
Loss related to a coinsurance transaction (76.5) -
Total EBIT (30.3) 202.3
Corporate interest expense (53.2) (36.9)
Income (loss) before net realized investment
losses and taxes (83.5) 165.4
Tax expense (benefit) (32.2) 60.0
Net income (loss) before net realized investment
losses (51.3) 105.4
Preferred stock dividends:
5.50% Class B mandatorily convertible preferred stock (14.1) (28.5)
Net operating income (loss) (65.4) 76.9
Net realized investment losses, net of related
amortization and taxes (51.9) (14.7)
Net income (loss) applicable to common stock $(117.3) $ 62.2
Per diluted share:
Net operating income (loss) $ (.39) $ .50
Net realized investment losses, net of
related amortization and taxes (.30) (.09)
Net income (loss) applicable to common stock $ (.69) $ .41
CONSECO, INC. AND SUBSIDIARIES
COLLECTED PREMIUMS
(Dollars in millions)
Three months ended
September 30,
2007 2006
Bankers Life segment:
Annuity $250.9 $278.2
Supplemental health 402.8 315.1
Life 49.1 47.8
Total collected premiums $702.8 $641.1
Conseco Insurance Group segment:
Annuity $ 77.5 $182.8
Supplemental health 145.6 145.5
Life 71.3 78.3
Total collected premiums $294.4 $406.6
Colonial Penn segment:
Life $ 29.3 $ 25.4
Supplemental health 2.6 3.0
Total collected premiums $ 31.9 $ 28.4
Other Business in Run-off segment:
Long-term care $ 75.2 $ 79.6
Major medical .5 .8
Total collected premiums $ 75.7 $ 80.4
BENEFIT RATIOS ON MAJOR SUPPLEMENTAL HEALTH LINES OF BUSINESS
Three Months Ended
September 30,
2007 2006
Bankers Life segment:
Medicare Supplement:
Earned premium $160 million $162 million
Benefit ratio(a) 69.4% 65.6%
PDP and PFFS:
Earned premium $97 million $22 million
Benefit ratio(a) 85.4% 82.1%
Long-Term Care:
Earned premium $156 million $151 million
Benefit ratio(a) 105.8% 98.2%
Interest-adjusted benefit ratio
(a non-GAAP measure)(b) 74.5% 68.8%
Conseco Insurance Group (CIG) segment:
Medicare Supplement:
Earned premium $57 million $62 million
Benefit ratio(a) 68.6% 66.8%
Specified Disease:
Earned premium $90 million $89 million
Benefit ratio(a) 103.2% 73.6%
Interest-adjusted benefit ratio
(a non-GAAP measure)(b) 70.3% 41.2%
Other Business in Run-off segment:
Earned premium $77 million $83 million
Benefit ratio(a) 137.4% 136.0%
Interest-adjusted benefit ratio
(a non-GAAP measure)(b) 75.1% 83.1%
(a) The benefit ratio is calculated by dividing the related product's
insurance policy benefits by insurance policy income.
(b) The interest-adjusted benefit ratio (a non-GAAP measure) is calculated
by dividing the product's insurance policy benefits less interest
income on the accumulated assets backing the insurance liabilities by
insurance policy income. Interest income is an important factor in
measuring the performance of longer duration health products. The net
cash flows generally cause an accumulation of amounts in the early
years of a policy (accounted for as reserve increases), which will be
paid out as benefits in later policy years (accounted for as reserve
decreases). Accordingly, as the policies age, the benefit ratio will
typically increase, but the increase in the change in reserve will be
partially offset by interest income earned on the accumulated assets.
The interest-adjusted benefit ratio reflects the interest income
offset. Since interest income is an important factor in measuring the
performance of these products, management believes a benefit ratio,
which includes the effect of interest income, is useful in analyzing
product performance. Additional information concerning this non-GAAP
measure is included in our periodic filings with the Securities and
Exchange Commission that are available in the "Investor - SEC Filings"
section of Conseco's website, www.conseco.com.
SOURCE Conseco, Inc.
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