Conseco at Reasonable Discount

On June 25, 2009, Conseco, Inc. (CNO - Analyst Report) announced the coinsurance agreement of two of its insurance companies in its Conseco Insurance Group. The insurance companies will coinsure about 104,000 non-core life insurance policies with Wilton Reassurance Company, a Minnesota reinsurance company.

Management expects this transaction to increase CNO's consolidated risk-based capital ratio by 8 percentage points, along with increasing statutory capital. Since CNO's results have been suffering from reduced financial flexibility for the last few quarters, the capital-building action will bring some relief. The transaction is expected to close in 3Q09.

As part of this transaction, Wilton Reassurance will pay a ceding commission of approximately $57.5 million. Also, it will coinsure and administer 100% of these policies. The insurance companies of CNO will transfer approximately $409 million in cash and policy loans and $466 million of statutory policy and other reserves to Wilton Reassurance.

CNO's risk-based capital ratios will also benefit from the recent action taken by the National Association of Insurance Commissioners (NAIC) to modify the mortgage experience adjustment factor for 2009.

Additionally, during 4Q08, CNO undertook some measures to bolster its capital position. One of the most significant of these moves relates to reinsuring a portion of the Bankers' LTC business. The company entered into a traditional coinsurance agreement with Reinsurance Group of America (RGA - Analyst Report) whereby it reinsured new business in 2008, 2009, and beyond.

Though we remain concerned with the continued weakness in CNO's net results for the past few quarters and anticipate additional losses in its investment portfolio, the recent actions will bring some stability.

At the current price level, the shares of CNO trade at 0.10x its 1Q09 book value of $18.57 per diluted share (excluding AOCI), an 86% discount to the 0.70x median of the peer group ((UNM - Analyst Report), (TMK - Analyst Report), (LNG - Snapshot Report), (SFG - Analyst Report) and (PNX - Snapshot Report).

On a price-to-book basis, this discount looks reasonable, given an ROE that is only 20% below the peer group median. We do not expect any significant expansion in the multiple in the near future. Thus, we maintain our Hold recommendation on the shares of CNO.