Conseco Misses by a Penny

Conseco, Inc’s (CNO - Analyst Report) second-quarter operating earnings of $0.22 per share were only a penny short of the Zacks Consensus Estimate. Though the results continued to be negatively impacted by the challenging financial markets and realized investment losses, collected premium continued to show accelerated growth especially at Bankers Life and Colonial Penn segments.  However, Conseco Insurance Group's results declined slightly.
 
Net operating income came in at $40.8 million, up 61.9% from $25.2 million in the prior-year quarter. The increase primarily resulted from an 82.9% year-over-year increase in Bankers Life’s EBIT (income before net realized investment gains, interest and taxes) and 45.7% decrease in Corporate Operations’ loss.
 
In the Bankers Life segment, EBIT increased to $63.3 million from $34.6 million in the prior-year quarter. The results were aided by improved earnings in the long-term care block, increase in earnings from Medicare supplement products and increase in earnings related to the company-owned life insurance policies.
 
The Conseco Insurance Group’s EBIT was $21.2 million, compared to $32.3 million in the prior-year quarter. Results for the quarter were affected by reduction in earnings from the annuity block, specified disease products margins and long-term care products margins.  
 
Colonial Penn’s EBIT increased 32.5% year over year to $11.0 million. Second quarter results were primarily affected by the recognition of a $3.0 million final distribution and commutation amount following the termination of a group insurance pool that Colonial Penn previously participated in.
 
Net realized investment losses for the quarter were $13.2 million (net of related amortization and taxes and the establishment of a valuation allowance for deferred tax assets related to such losses) included $36.6 million of other-than-temporary impairment losses recognized in earnings. These compare favorably with net realized investment losses of $17.4 million (net of related amortization and taxes) in the prior-year quarter.
 
The debt-to-total capital ratio (excluding AOCI) was 26.7% as of Jun 30, 2009, compared to 27.8% as of Dec 31, 2008. Book value (excluding AOCI) as of Jun 30, 2009 was $18.72 per share, compared to $18.41 as of Dec 31, 2008.
 
We remain concerned with the continued weakness in the net results for the past few quarters and anticipate additional losses in the investment portfolio. However, cost-cutting measures are running ahead of management’s initial targets with expense reductions and the company is focused on maintaining a strong capital position. We think that all the negatives have already been factored into the price.

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