Conseco Reports Second Quarter Results

Tuesday, August 12, 2008 9:00 AM

Symbols: CNO

CARMEL, Ind., Aug. 12 /PRNewswire-FirstCall/ -- Conseco, Inc. (NYSE: CNO) today reported results for the second quarter of 2008.

'Upon approval of our plans announced yesterday to transfer Conseco Senior Health Insurance Company to an independent trust, Conseco will have completed the most significant element of its program to pursue strategic alternatives,' CEO Jim Prieur said.

'Conseco's financial performance continued to stabilize in the second quarter,' Prieur said, 'as the company reported profits in all four business segments. Conseco delivered strong growth in new business, with overall sales, excluding Private-Fee-For-Service sales, growing by 8 percent. Bankers Life sales, excluding Private-Fee-For-Service, grew 9 percent, while Colonial Penn's sales grew by 29 percent, and Conseco Insurance Group, with refocused sales efforts, produced higher value from new business despite lower overall sales.'

'Importantly, our long-term care closed block of business returned to profitability in the quarter, as our efforts to strengthen reserves and improve claims management over the past year are proving successful,' Prieur said. 'Financial results for Bankers Life, although improved over the first quarter, were disappointing, as it continued to be pressured by higher than expected initial claims in its long-term care business. Measures implemented last quarter to address this issue, including premium re-rates and enhanced claims management policies and procedures, will lead to improved performance over time.'

'Our investment portfolio continues to perform, with earned yields meeting expectations and impairment losses significantly lower than for most life insurers on a percentage of assets basis,' CFO Ed Bonach said. 'Additionally, we completed the consolidation of our Chicago facilities, which generated a pre-tax charge of $9.6 million, versus the original estimate of $15 million. The consolidation will provide an annual savings of $5 million going forward.'

Second quarter 2008 results:

-- Total New Annualized Premium ('NAP') (1): $85.6 million, down 21% from 2Q07 ($92.4 million, excluding Private-Fee-For-Service, up 8 percent from 2Q07)

-- Income (loss) before net realized investment losses, corporate interest and taxes ('EBIT') (2): $66.6 million, compared to $(52.8) million in 2Q07

-- Net operating income (loss) (3) before valuation allowance for deferred tax assets: $33.4 million, compared to $(49.7) million in 2Q07

-- Net operating income (loss) before valuation allowance for deferred tax assets per diluted share: 18 cents, compared to (29) cents in 2Q07

-- Net loss applicable to common stock: $487.1 million, compared to $59.8 million in 2Q07 (including $370.0 million valuation allowance for deferred tax assets and $150.5 million of net realized investment losses in 2Q08 vs. $10.1 million of net realized investment losses in 2Q07)

-- Net loss per diluted share: $2.64, compared to 35 cents in 2Q07 (including $2.00 of valuation allowance for deferred tax assets and 82 cents of net realized investment losses in 2Q08 vs. 6 cents of net realized investment losses in 2Q07)

Six-month 2008 results:

-- Total New Annualized Premium ('NAP') (1): $234.1 million, down 3% from the first six months of 2007 ($176.8 million, excluding Private-Fee-For-Service, up 2 percent from the first six months of 2007)

-- Income (loss) before net realized investment losses, corporate interest and taxes ('EBIT') (2): $114.7 million, compared to $(16.5) million in the first six months of 2007

-- Net operating income (loss) (3) before valuation allowance for deferred tax assets: $54.1 million, compared to $(46.0) million in the first six months of 2007

-- Net operating income (loss) before valuation allowance for deferred tax assets per diluted share: 29 cents, compared to (29) cents in the first six months of 2007

-- Net loss applicable to common stock: $492.9 million, compared to $69.8 million in the first six months of 2007 (including $370.0 million valuation allowance for deferred tax assets and $177.0 million of net realized investment losses in the first six months of 2008 vs. $23.8 million of net realized investment losses in the first six months of 2007)

-- Net loss per diluted share: $2.67, compared to 44 cents in the first six months of 2007 (including $2.00 of valuation allowance for deferred tax assets and 96 cents of net realized investment losses in the first six months of 2008 vs. 15 cents of net realized investment losses in the first six months of 2007)

Financial strength at June 30, 2008:

-- Book value per diluted share, excluding accumulated other comprehensive income (loss) (4), was $21.76, compared to $24.41 at December 31, 2007

-- Debt-to-total capital ratio, excluding accumulated other comprehensive loss (4), was 22.8%, compared to 20.9% at December 31, 2007

Operating results

    Results by segment for the quarter were as follows ($ in millions, except
per share data):
                                                          Three months ended
                                                               June 30,
                                                           2008       2007
    EBIT (2), excluding costs related to a                         (Restated)
     litigation settlement:
       Bankers Life                                        $34.6     $ 70.5
       Colonial Penn                                         8.3        6.7
       Conseco Insurance Group.                             30.0       43.3
       Other Business in Run-off                            12.2     (130.3)
       Corporate Operations, excluding corporate
        interest expense                                   (18.5)      (8.0)
          EBIT, excluding costs related to a
           litigation settlement                            66.6      (17.8)
       Costs related to a litigation settlement                -      (35.0)
          Total EBIT                                        66.6      (52.8)
    Corporate interest expense                             (13.9)     (16.9)
         Income (loss) before net realized investment
          losses and taxes                                  52.7      (69.7)
    Tax expense (benefit) on period income                  19.3      (24.6)
         Net income (loss) before net realized investment
          losses and valuation allowance for deferred tax
          assets                                            33.4      (45.1)
    Preferred stock dividends:
       5.50% Class B mandatorily convertible preferred
        stock                                                  -       (4.6)
          Net operating income (loss) before net
           realized investment losses and valuation
           allowance for deferred tax assets                33.4      (49.7)
    Valuation allowance for deferred tax assets            370.0          -
       Net operating loss                                 (336.6)     (49.7)
    Net realized investment losses, net of related
     amortization and taxes                               (150.5)     (10.1)
       Net loss applicable to common stock               $(487.1)    $(59.8)
    Per diluted share:
       Net operating income (loss) before valuation
        allowance for deferred tax assets                   $.18      $(.29)
       Valuation allowance for deferred tax asset          (2.00)         -
       Net operating loss                                  (1.82)      (.29)
       Net realized investment losses, net of related
        amortization and taxes                              (.82)      (.06)
       Net loss applicable to common stock                $(2.64)     $(.35)

In our Bankers Life segment, pre-tax operating earnings were $34.6 million in the second quarter of 2008, compared to $70.5 million in the second quarter of 2007. Results for the second quarter of 2008 were affected by:

-- a reduction in earnings of approximately $26 million resulting from an increase in the interest-adjusted benefit ratio on long-term care policies primarily driven by higher claim expenses; and

-- a reduction in earnings of approximately $7 million resulting from an increase in the benefit ratio on Medicare supplement policies primarily driven by higher claim expenses and lower sales.

In our Colonial Penn segment, the pre-tax operating earnings were $8.3 million in the second quarter of 2008, compared to $6.7 million in the second quarter of 2007. Results for the second quarter of 2008 were affected by the growth in this segment and the positive income impacts following the recapture of a modified coinsurance agreement in the fourth quarter of 2007.

In our Conseco Insurance Group segment, pre-tax operating earnings were $30.0 million in the second quarter of 2008, compared to $43.3 million in the second quarter of 2007. Results for the second quarter of 2008 were affected by:

-- a reduction in earnings of approximately $9 million in the second quarter of 2008 related to a block of annuity business that was coinsured in October 2007;

-- a reduction in earnings of approximately $5 million resulting from an increase in the interest-adjusted benefit ratio on specified disease policies primarily driven by higher incurred claims;

-- a reduction in earnings of approximately $4 million resulting from an increase in the benefit ratio on Medicare supplement policies related to lower sales and higher incurred claims; and

-- lower expenses of $6 million in the second quarter of 2008 primarily due to decreased litigation costs and reduced expenses in agent care and marketing.

In our Other Business in Run-off segment, we recognized a pre-tax operating earnings of $12.2 million in the second quarter of 2008, compared to a loss of $130.3 million in the second quarter of 2007.