CNO Reports 20% Increase in Second Quarter 2010 Net Income and Continued Sales Growth

CARMEL, Ind., Aug. 3 /PRNewswire-FirstCall/ -- CNO Financial Group, Inc. (NYSE: CNO) today announced results for the second quarter of 2010.  "Sales across all three of our segments continued to be strong during the second quarter," CEO Jim Prieur said.  "Earnings for the quarter also were strong, with net operating income of 16 cents per diluted share ahead of our expectations."

Second Quarter Results

• Net income of $33.1 million, up 20% over 2Q09 (including $11.8 million of net realized investment losses and loss on extinguishment of debt in 2Q10 vs. $13.2 million of net realized investment losses in 2Q09)
• Net income per diluted share of 12 cents, compared to 15 cents in 2Q09 (reflecting dilution of 5 cents per share related to the issuance of common stock and convertible debentures; and including 4 cents of net realized investment losses and loss on extinguishment of debt in 2Q10 vs. 7 cents of net realized investment losses in 2Q09) (1)
• $89.7 million of income before net realized investment losses, corporate interest and taxes ("EBIT") (2), up 3% compared to $86.7 million in 2Q09
• Net operating income (3) of $44.9 million, up 10% compared to $40.8 million in 2Q09
• Net operating income per diluted share:  16 cents, compared to 22 cents in 2Q09 (reflecting dilution of 7 cents per share related to the issuance of common stock and convertible debentures) (1)
• Total new annualized premium ("NAP") excluding Private-Fee-For-Service ("PFFS") and Prescription Drug Plan ("PDP") (4):  $95.3 million, up 5% from 2Q09, with growth in all three segments

Six-Month Results

• Net income of $67.0 million, up 29% compared to the first six months of 2009 (including $16.1 million of net realized investment losses and loss on extinguishment of debt in the first six months of 2010 vs. $26.2 million of net realized investment losses and loss on modification of debt in the first six months of 2009)
• Net income per diluted share of 25 cents, compared to 28 cents in the first six months of 2009 (including 5 cents of net realized investment losses and loss on extinguishment of debt in the first six months of 2010 vs. 14 cents of net realized investment losses and loss on modification of debt in the first six months of 2009) (1)
• $168.9 million of income before net realized investment losses, corporate interest and taxes ("EBIT") (2), up 6% compared to the first six months of 2009
• Net operating income (3) of $83.1 million, up 6% compared to the first six months of 2009
• Net operating income per diluted share:  30 cents, compared to 42 cents in the first six months of 2009 (1)
• NAP excluding PFFS and PDP (4):  $182.6 million, up 4% from the first six months of 2009, with growth in all three segments

Financial Strength at June 30, 2010

• Including an 8 point decrease from the adoption of the new Mortgage Experience Adjustment Factors, the combined statutory risk-based capital ratio of our insurance subsidiaries decreased 1 percentage point to 318% in 2Q10
• Debt-to-total capital ratio, excluding accumulated other comprehensive income (loss) (5), improved to 21.0% from 21.5% at December 31, 2009
• Book value per common share, excluding accumulated other comprehensive income (loss) (5), increased to $15.39 from $15.14 at December 31, 2009
• Accumulated other comprehensive income (loss) improved in 2Q10 by $421.8 million, to accumulated other comprehensive income of $318.8 million, reflecting the increase in estimated fair value of our actively managed fixed maturity investments

Segment Results

Bankers Life:  Pre-tax operating earnings were $64.0 million in 2Q10, essentially flat with earnings in 2Q09.

Colonial Penn:  Pre-tax operating earnings were $7.6 million in 2Q10 down 31% compared to 2Q09.  Excluding the impact of a $3 million gain in 2Q09 related to the termination of a group insurance pool, Colonial Penn's results were essentially flat with prior-period earnings.

Conseco Insurance Group:  Pre-tax operating earnings were $29.9 million in 2Q10 up 41% compared to 2Q09.  Results for the second quarter of 2010 were driven by higher investment spreads resulting from bond prepayment income, along with higher book yields on our investment portfolio, and improved annuity persistency.

Corporate Operations (including our investment advisory subsidiary and corporate expenses):  Results for 2Q10 compared to 2Q09 reflect increased expenses, including $2 million related to a terminated lease obligation and rebranding expenses.

Results for 2Q10 included the recognition of a $0.6 million extinguishment loss, net of income taxes, related to the repurchase of $52.5 million aggregate principal amount of 3.5% convertible senior debentures.  

Investment Results

Net realized investment losses in 2Q10 were $11.2 million (net of related amortization and taxes), including total other-than-temporary impairment losses of $29.3 million, of which $27.9 million was recorded in earnings and $1.4 million in accumulated other comprehensive income (loss).  Net realized investment losses in 2Q09 of $13.2 million (net of related amortization and taxes and the establishment of a valuation allowance for deferred tax assets related to such losses), including:  (i) total other-than-temporary impairment losses of $53.7 million, of which $36.6 million was recorded in earnings and $17.1 million in accumulated other comprehensive income (loss); and (ii) $4.6 million increase to the deferred tax valuation allowance.

Sales Results

At Bankers Life (career distribution), total NAP (excluding PFFS and PDP) in 2Q10 was $64.0 million, up 3% from 2Q09.

At Colonial Penn (direct distribution), total NAP was $12.2 million, up 16% from 2Q09.

At Conseco Insurance Group (independent distribution), total NAP was $19.1 million, up 6% from 2Q09.

Accounting Matters

Effective January 1, 2010, we adopted authoritative guidance requiring us to consolidate a variable interest entity.  At that date, the cumulative effect of this accounting change was a decrease to shareholders' equity of $15.9 million, including $6.2 million included in accumulated other comprehensive income (loss).

Conference Call

The Company will host a conference call to discuss results on August 4, 2010 at 10:00 a.m. Eastern Daylight Time.  The webcast can be accessed through the Investors section of the company's website: http://investor.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 this morning at the Investors section of the company's website.

About CNO  

CNO is a holding company.  Our insurance subsidiaries – principally Bankers Life and Casualty Company, Colonial Penn Life Insurance Company and Washington National Insurance Company – serve working American families and seniors by helping them protect against financial adversity and provide for a more secure retirement.  For more information, visit CNO online at www.CNOinc.com.

1. Net income per diluted share and operating income per diluted share for 2Q2010 and the first six months of 2010 reflect the dilution from the issuance of 65.9 million shares of common stock and $293.0 million of convertible debentures.
2. Management believes that an analysis of earnings before net realized investment gains (losses), corporate interest expense, loss on extinguishment or modification of debt 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; (ii) loss on extinguishment or modification of debt; and (iii) 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 pages 2 and 8.
3. Management believes that an analysis of Net income applicable to common stock before:  (i) loss on extinguishment or modification of debt, net of income taxes; and (ii) 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 loss on extinguishment of debt and 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 pages 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 "Investors – SEC Filings" section of CNO's website, www.CNOinc.com.
4. 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 and PFFS sales are not comparable to other sales and are therefore excluded in all periods.  Effective January 1, 2010, we no longer assume any of the risks of PFFS business through reinsurance.
5. 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 19.7% and $16.66, respectively, at June 30, 2010, and 22.7% and $14.09, respectively, at December 31, 2009.
6. Amount in the second quarter of 2009 reflects a deferred tax valuation allowance of $4.6 million as it is more likely than not that tax benefits related to investment losses will not be utilized to offset future taxable 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" 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 continue to satisfy the financial ratio and balance requirements and other covenants of our debt agreements; (ii) general economic, market and political conditions, including the performance and fluctuations of the financial markets which may affect our ability to raise capital or refinance existing indebtedness and the cost of doing so; (iii) our ability to generate sufficient liquidity to meet our debt service obligations and other cash needs; (iv) our ability to obtain adequate and timely rate increases on our supplemental health products, including our long-term care business; (v) the receipt of any required regulatory approvals for dividend and surplus debenture interest payments from our insurance subsidiaries; (vi) 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; (vii) changes in our assumptions related to the cost of policies produced or the value of policies in force at the effective date; (viii) the recoverability of our deferred tax assets and the effect of potential ownership changes and tax rate changes on its value; (ix) our assumption that the positions we take on our tax return filings, including our position that our 7.0% convertible senior debentures due 2016 will not be treated as stock for purposes of Section 382 of the Internal Revenue Code of 1986, as amended, and will not trigger an ownership change, will not be successfully challenged by the Internal Revenue Service; (x) changes in accounting principles and the interpretation thereof; (xi) 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, (xii) performance and valuation of our investments, including the impact of realized losses (including other-than-temporary impairment charges); (xiii) 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; (xiv) the ultimate outcome of lawsuits filed against us and other legal and regulatory proceedings to which we are subject; (xv) our ability to complete the remediation of  the material weakness in internal controls over our actuarial reporting process and to maintain effective controls over financial reporting; (xvi) our ability to continue to recruit and retain productive agents and distribution partners and customer response to new products, distribution channels and marketing initiatives; (xvii) our ability to achieve eventual upgrades of the  financial strength ratings of CNO Financial and our insurance company subsidiaries as well as the impact of rating downgrades on our business and our ability to access capital; (xviii) the risk factors or uncertainties listed from time to time in our filings with the Securities and Exchange Commission; (xix) 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 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; and (xx) 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 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.