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CNO Financial Group, Inc. (CNO) |
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WIKI ANALYSIS
CNO Financial Group, Inc. (NYSE: CNO), formerly Conseco, emerged from bankruptcy in 2003, after which it has focused on insurance. It relies heavily on its Medicare, fixed-annuities, and long-term care operations, but also provides life insurance and disease-specific insurance. Its clients are primarily middle-class citizens and the elderly. In order to target these groups, Conesco uses a combination of direct marketing, independent distributors, and career agents.
Company Overview
Indianapolis-based CNO, Inc. is the top tier holding company for a group of insurance companies operating throughout the United States that develop, market and administer supplemental health insurance, annuity, individual life insurance and other insurance products. The company distributes these products through its Bankers Life segment (which utilizes a career agency force), through its CNO Insurance Group segment (which utilizes professional independent producers), and through its Colonial Penn segment (which utilizes direct response marketing).
The company has other business in Run-off segment which consists of long-term care products sold in prior years through independent agents, small group and individual major medical business which it stopped renewing in 2001 and other group major medical business which it no longer markets. Most of the long-term care business in run-off relates to business written by certain subsidiaries prior to their acquisition by CNO in 1996 and 1997. The company went public in 1985 and on September 10, 2003, emerged from Chapter 11 bankruptcy proceedings (which began in December 2002) intact. After emerging from bankruptcy, A.M. Best upgraded its ratings on CNO's core insurance subsidiaries to B++ (Very good) from B (fair), and raised its ratings on CNO Senior Health Insurance Company (a subsidiary of the company) to B++ from B.
CNO recently emerged from bankruptcy in 2003. It sold its finance business and has decided to focus on its insurance business, where it specializes in the senior citizens market. CNO’s revenue is earned through long-term health insurance, Medicare supplements, fixed annuities, and other types of insurance.
CNO conducts its sales by employing a large network of sales agents, as well hiring independent brokers and participating in direct marketing. Its sales force tends to target senior citizens and people in the middle-income bracket. Its business is carried out by its three largest segments: Banker’s Life, CNO Insurance Group, and Colonial Penn.
Business and Financial Metrics
Second Quarter 2010 Results[1]
CNO Financial reported net income of $33.1 million, up 20% over 2Q 2009 (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 was 12 cents, compared to 15 cents in 2Q 2009 (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). CNO reported $89.7 million of income before net realized investment losses, corporate interest and taxes, up 3% compared to $86.7 million in 2Q09.
Business Segments
Banker’s Life
Banker’s Life primarily markets and distributes Medicare supplement, long-term care, and life insurance. It also provides annuities targeted for the senior citizen market. It employs 5,100 agents and sales managers, and markets its products under its own name.
Bankers Life consists of the business of Bankers Life and Casualty Company. It markets and distributes health and life insurance products and annuities to the middle-income senior market. Products include Medicare supplement insurance, life insurance, fixed annuities and long-term care insurance. Bankers Life also markets and distributes Medicare Part D prescription drug plans through a distribution and reinsurance arrangement with Coventry Health Care (Coventry) and Medicare Advantage plans primarily through a distribution arrangement with Humana Inc. (Humana).
CNO Insurance Group
CNO Insurance Group markets specific disease, Medicare supplement, and life insurance products in addition to annuities products. Their target markets are mainly senior citizens and members of the middle income bracket. Its products are primarily sold by independent insurance brokers.
Conseco Insurance Group, which markets and distributes specified disease insurance, accident, disability, life insurance and annuities to middle-income consumers at home and at the worksite. These products are marketed through Performance Matters Associates, Inc., a wholly owned subsidiary, and through independent marketing organizations and insurance agencies. Products being marketed by Conseco Insurance Group are underwritten by Conseco Insurance Company, Conseco Health Insurance Company (Conseco Health) and Washington National Insurance Company (Washington National). This segment also includes blocks of long-term care and other insurance business, in these companies.
Colonial Penn
Colonial Penn focuses on life insurance which it markets through television commercials, telemarketing, direct mail, and internet advertising. Colonial Penn focuses on the 50+ age demographic and markets its products under its own name.
Colonial Penn, which consists of the business of Colonial Penn Life Insurance Company (Colonial Penn), markets primarily graded benefit and simplified issue life insurance directly to customers through television advertising, direct mail, the Internet and telemarketing. Colonial Penn markets its products under its own brand name.
Trends and Forces
Inadequate reserve for policy benefits
Inadequate reserves for expected future policy benefits might be higher than expected, which could result in decreased net income and stockholders’ equity. Conesco calculates its reserves using historical data. Discrepancies between past claims and future claims may result in insufficient reserves. Faster-than-expected increases in medical costs, obesity, and other unforeseen events and costs may force Conesco to pay the difference from its earnings.
Annuities products are susceptible to changes in interest rates
Its annuities products are highly susceptible to fluctuations in interest rates. An increase in interest rates may cause its annuities holders to invest their money elsewhere. A decrease in interest rates could result in its payments to annuity holders exceeding the investment returns of the annuity. Only 38% of its annuities have variable interest rates, while 47% have fixed interest rates. If a large amount of customers back out of their annuities, Conesco may be forced to sell part of its investment assets in order to cover the loss.
Insurance business restructuring
Conesco’s future will be influenced by its ability to restructure its insurance business. Despite having emerged from bankruptcy in 2003, its insurance business has been plagued with decreased insurance revenues and new annuity premium revenues. In an effort to increase profits, Conesco will be focusing on marketing its higher-margin products and will be decreasing marketing costs for its underperforming products. Conesco’s predecessor owned 44 insurance companies, resulting in unnecessary duplicate administrative positions and systems. In order to remedy this, planning on streamlining administrative tasks and combining paperwork and processing systems for similar products.
References
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