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Conseco Inc. (NYSE: CNO)

Conseco Inc. (CNO), through its subsidiaries, engages in the development, marketing and administration of supplemental health insurance, annuity, individual life insurance and other insurance products for senior and middle-income markets in the United States.

The Company operates in three segments: Bankers Life, Colonial Penn, and Conseco Insurance Group. The Bankers Life segment markets and distributes Medicare supplement insurance, life insurance, long-term care insurance, Medicare part D prescription drug program, Medicare advantage products, and certain annuity products through career agents and sales managers. The Colonial Penn segment markets primarily graded benefit and simplified issue life insurance directly to customers through television advertising, direct mail, Internet and telemarketing. The Conseco Insurance Group segment markets and distributes specified disease insurance, Medicare supplement insurance, and various life and annuity products through independent marketing organizations. This segment markets its products under the Conseco and Washington National brand names.

The Company also offers reinsurance products. It also sells products through professional independent producers and direct marketing. CNO has a strategic alliance with Coventry Health Care.

The Company was founded in 1979 and is headquartered in Carmel, Indiana.

Source: Reuters.com, SEC Filings.

Financial Summary

The Company reported Q2 2009 results at the high end of the management’s guidance, despite declining market and higher recruitment at the Bankers Life segment.

For Q2 2009, CNO reported net income of $27.6 million, compared to a net loss of $488.5 million in Q2 2008 (including $13.2 million of net realized investment losses in Q2 2009 vs. $513.7 million of net realized investment losses, valuation allowance for deferred tax assets and losses related to discontinued operations in Q2 2008). Net income per diluted share ranged at 15 cents, compared to a net loss per diluted share of $2.65 in Q2 2008.

Book value per common share, excluding accumulated other comprehensive income, was $18.72 at June 30, 2009, up 2%, compared to $18.41 at December 31, 2008. Debt-to-total capital ratio, excluding accumulated other comprehensive income was 26.7%, compared to 27.8% at December 31, 2008. The Company’s financial statements show compliance, as of June 30, 2009, with all covenants in its credit agreement including those related to combined insurance subsidiary capital, the combined risk-based capital ratio of its insurance subsidiaries, the Company’s debt to capital ratio and the Company’s interest coverage ratio.

The combined risk-based capital ratio increased by 16 percentage points to 247% at June 30, 2009. The improved ratio reflects: (i) a 29 percentage point increase resulting from the actions by the National Association of Insurance Commissioners to modify the mortgage experience adjustment factor described in the Company’s Form 8-K dated June 22, 2009; (ii) a 14 percentage point increase due to second quarter statutory income; and (iii) a 26 percentage point decrease due to losses, valuation changes and security downgrades related to the Company’s investment portfolio.

CNO’s stock has traded between 26 cents and $9.24 in the past year, and is 10% up since the beginning of 2009, mainly due to strong Q2 2009 results.

Analyst Consensus

Source: http://www.reuters.com/finance/stocks/estimates?symbol=CNO.N

Four analysts covering the Company recommend a “Hold strategy” for CNO.

Source: http://markets.ft.com/tearsheets/analysis.asp?s=CNO%3ANYQ

Investment Highlights

CNO is a 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 sells its products through three distribution channels: career agents, professional independent producers (some of whom sell one or more of our product lines exclusively) and direct marketing.

The Company announced a plan to consolidate three insurance companies within its Conseco Insurance Group segment. Under the plan, two insurance subsidiaries – Conseco Insurance Company and Conseco Health Insurance Company – would be merged into a third subsidiary – Washington National Insurance Company (WNIC). The Company expects to complete the merger in the fourth quarter of 2009.

Upon completion of the merger, WNIC (domiciled in Illinois) would have approximately $5.3 billion of statutory assets, 925,000 policies in force, $625 million of annual premiums, and $4.3 billion of statutory policy reserves, comprised of specified disease and other supplemental health policies (58%), annuities and other deposits (33%), and life insurance policies (9%).

CNO has received the required regulatory approvals for the transaction under which two insurance companies in its Conseco Insurance Group are coinsuring, with an effective date of January 1, 2009, approximately 104,000 non-core life insurance policies with Wilton Reassurance Company, a Minnesota reinsurance company. This transaction improves CNO’s consolidated risk-based capital ratio and increases statutory capital. As a result of the transaction, CNO expects to record an increase to its deferred tax valuation allowance of approximately $20 million in the third quarter of 2009. Conseco also expects to record a deferred gain of approximately $23 million.

A number of law firms announced lawsuits against CNO on behalf of those who purchased the common stock of CNO between August 4, 2005, to March 17, 2008 (the Class Period). The complaint charges that defendants violated federal securities laws. Specifically, defendants misrepresented and/or failed to disclose the following: (i) that the Company was reporting materially inaccurate revenue figures; (ii) that the Company’s reported financial results were materially misstated and did not present the Company’s true operating performance; (iii) that the Company’s shareholders’ equity was materially overstated during the Class Period, including the overstatement of shareholders’ equity by $20.6 million at December 31, 2006; and (iv) as a result, defendants lacked a reasonable basis for their positive statements about the Company, its corporate governance practices and earnings growth.

The Senate Finance Committee handed a major victory to the health care industry on October 6, by voting down two proposals that would have created a “public option” to compete against private health insurance providers as part of an overhaul of the nation’s health care system. The insurance industry has fought the public option with lobbying expenses and campaign contributions since the beginning of the year, fearing that the proposed policy would cut into their record profits.

According to new data released by SNL Financial, strength in second-quarter income statements more than compensated for first-quarter weakness as the U.S. life and health insurance industry saw its capital and surplus levels rebound just short of year-end 2008 levels. Strong life sector profitability helped the industry’s policyholders’ surplus jump to $252.2 billion in the aggregate as of June 30, up from $240.6 billion as of March 31 and not far from the year-end 2008 level of $252.5 billion. The increase in surplus stands in contrast to the quarter-over-quarter declines the life sector experienced in five of the six previous reporting periods.

SNL data indicate that 16 of the top 25 U.S. life groups saw their statutory net income improve sequentially in the second quarter, despite declining revenues and investment losses. Lower expenses helped the life industry produce net income of $8.9 billion in the second quarter, up from a loss of $804 million in the first quarter and a $556.7 million loss in the year-earlier period.

Technical Analysis

Source: http://stockcharts.com/h-sc/ui

CNO closed above its 13-day moving average. This is generally considered to an indication of a bullish trend.

CNO has been relatively stable recently. This is evidenced by the width of its Bollinger Bands, which are tighter than normal. Additionally, CNO is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.

CNO’s MACD is indicating a weak bearish signal. Although the indicator is above the critical level of 0, which implies that the underlying moving averages are bullish, the MACD has crossed below its 9-day moving average or signal line. This suggests that positive momentum has begun to slow.

Comparative Analysis

Source: Thomson Financial, Yahoo! Finance, Analyst estimates.

Insider Trading Activity

Data provided by Thomson Financial

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