CNO Financial Group reports second quarter 2013 results

Three months ended

June 30,

2013

2012

(Dollars in millions,

except per share data)

EBIT (4):

Bankers Life

$

79.1

$

76.1

Washington National

31.8

33.9

Colonial Penn

1.2

.6

Other CNO Business

2.6

1.9

   EBIT from business segments

114.7

112.5

Corporate Operations, excluding corporate interest expense

2.4

(9.1)

   EBIT

117.1

103.4

Corporate interest expense

(13.1)

(16.6)

   Operating earnings before tax

104.0

86.8

Tax expense on operating income

36.3

32.6

   Net operating income (1)

67.7

54.2

Net realized investment gains (net of related amortization and taxes)

1.8

18.7

Fair value changes in embedded derivative liabilities (net of related amortization and taxes)

12.1

(6.9)

Equity in earnings of certain non-strategic investments and earnings attributable to non-

controlling interests (net of taxes)

(2.7)

—

Loss on extinguishment of debt (net of taxes)

(6.8)

(.3)

   Net income before valuation allowance for deferred tax assets

72.1

65.7

Valuation allowance for deferred tax assets

5.0

—

   Net income

$

77.1

$

65.7

Per diluted share:

Net operating income

$

.30

$

.20

Net realized investment gains (net of related amortization and taxes)

.01

.06

Fair value changes in embedded derivative liabilities (net of related amortization and

taxes)

.05

(.02)

Equity in earnings of certain non-strategic investments and earnings attributable to non-

controlling interests (net of taxes)

(.01)

—

Loss on extinguishment of debt (net of taxes)

(.03)

—

Valuation allowance for deferred tax assets

.02

—

   Net income

$

.34

$

.24

Three months ended

June 30, 2013*

Actual

results

Significant

items

Excluding

significant

items

Net Operating Income (1):

Bankers Life

$

79.1

$

(2.5)

$

76.6

Washington National

31.8

(1.5)

30.3

Colonial Penn

1.2

—

1.2

Other CNO Business

2.6

—

2.6

   EBIT from business segments

114.7

(4.0)

110.7

Corporate Operations, excluding corporate interest expense

2.4

(6.0)

(3.6)

   EBIT (4)

117.1

(10.0)

107.1

Corporate interest expense

(13.1)

—

(13.1)

   Operating earnings before tax

104.0

(10.0)

94.0

Tax expense on operating income

36.3

(3.5)

32.8

   Net operating income

$

67.7

$

(6.5)

$

61.2

Net operating income per diluted share

$

.30

$

(.03)

$

.27

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(Dollars in millions)

June 30, 2013

December 31, 2012

(unaudited)

ASSETS

Investments:

Fixed maturities, available for sale, at fair value (amortized cost:  June 30, 2013 -

$22,023.7; December 31, 2012 - $21,626.8)

$

23,623.0

$

24,614.1

Equity securities at fair value (cost: June 30, 2013 - $230.8; December 31, 2012 -

$167.1)

241.3

171.4

Mortgage loans

1,692.2

1,573.2

Policy loans

269.1

272.0

Trading securities

241.0

266.2

Investments held by variable interest entities

1,087.9

814.3

Other invested assets

312.6

248.1

   Total investments

27,467.1

27,959.3

Cash and cash equivalents - unrestricted

280.0

582.5

Cash and cash equivalents held by variable interest entities

210.7

54.2

Accrued investment income

294.8

286.2

Present value of future profits

591.6

626.0

Deferred acquisition costs

762.1

629.7

Reinsurance receivables

2,838.0

2,927.7

Income tax assets, net

931.2

716.9

Assets held in separate accounts

15.0

14.9

Other assets

385.1

334.0

   Total assets

$

33,775.6

$

34,131.4

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:

Liabilities for insurance products:

   Interest-sensitive products

$

12,784.2

$

12,893.2

   Traditional products

10,834.4

11,196.3

   Claims payable and other policyholder funds

1,006.4

985.1

   Liabilities related to separate accounts

15.0

14.9

Other liabilities

626.8

570.6

Investment borrowings

1,878.0

1,650.8

Borrowings related to variable interest entities

1,143.7

767.0

Notes payable – direct corporate obligations

905.7

1,004.2

   Total liabilities

29,194.2

29,082.1

Commitments and Contingencies

Shareholders' equity:

Common stock ($0.01 par value, 8,000,000,000 shares authorized, shares issued

and outstanding: June 30, 2013 - 219,378,666; December 31, 2012 –

221,502,371)

2.2

2.2

Additional paid-in capital

4,128.2

4,174.7

Accumulated other comprehensive income

698.1

1,197.4

Accumulated deficit

(247.1)

(325.0)

   Total shareholders' equity

4,581.4

5,049.3

   Total liabilities and shareholders' equity

$

33,775.6

$

34,131.4

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(Dollars in millions, except per share data)

(unaudited)

Three months ended

Six months ended

June 30,

June 30,

2013

2012

2013

2012

Revenues:

   Insurance policy income

$

691.3

$

694.8

$

1,382.5

$

1,381.1

   Net investment income:

      General account assets

348.8

351.1

700.7

696.3

      Policyholder and reinsurer accounts and other special-

      purpose portfolios

31.8

(17.3)

109.5

48.3

   Realized investment gains:

      Net realized investment gains, excluding impairment

      losses

3.8

35.4

19.1

66.2

      Other-than-temporary impairment losses:

         Total other-than-temporary impairment losses

(.6)

(3.5)

(.6)

(11.4)

         Portion of other-than-temporary impairment losses

         recognized in accumulated other comprehensive

         income

—

—

—

—

      Net impairment losses recognized

(.6)

(3.5)

(.6)

(11.4)

   Total realized gains

3.2

31.9

18.5

54.8

   Fee revenue and other income

6.4

4.5

12.9

8.4

         Total revenues

1,081.5

1,065.0

2,224.1

2,188.9

Benefits and expenses:

   Insurance policy benefits

673.2

689.7

1,427.3

1,378.7

   Interest expense

26.9

28.7

54.2

57.5

   Amortization

79.2

68.3

158.5

154.9

   Loss on extinguishment of debt

7.7

.5

65.4

.7

   Other operating costs and expenses

179.8

173.3

369.4

400.3

      Total benefits and expenses

966.8

960.5

2,074.8

1,992.1

         Income before income taxes

114.7

104.5

149.3

196.8

Income tax expense (benefit):

      Tax expense on period income

42.6

38.8

75.8

72.0

      Valuation allowance for deferred tax assets

(5.0)

—

(15.5)

—

         Net income

$

77.1

$

65.7

$

89.0

$

124.8

Earnings per common share:

Basic:

   Weighted average shares outstanding

220,498,000

237,289,000

221,290,000

239,092,000

   Net income

$

.35

$

.28

$

.40

$

.52

Diluted:

   Weighted average shares outstanding

230,893,000

293,475,000

237,180,000

295,409,000

   Net income

$

.34

$

.24

$

.38

$

.45

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

EBIT FROM BUSINESS SEGMENTS

SUMMARIZED BY IN-FORCE AND NEW BUSINESS (6)

(Dollars in millions)

Three months ended

Six months ended

June 30,

June 30,

2013

2012

2013

2012

EBIT (4) from In-force and New Business

Bankers Life segment:

In-Force Business

$

109.6

$

102.6

$

205.7

$

199.7

New Business

(30.5)

(26.5)

(64.5)

(53.1)

   Total

$

79.1

$

76.1

$

141.2

$

146.6

Washington National segment:

In-Force Business

$

31.0

$

34.2

$

60.7

$

61.6

New Business

.8

(.3)

.5

(3.0)

   Total

$

31.8

$

33.9

$

61.2

$

58.6

Colonial Penn segment:

In-Force Business

$

12.4

$

11.2

$

21.2

$

17.9

New Business

(11.2)

(10.6)

(25.4)

(27.1)

   Total

$

1.2

$

.6

$

(4.2)

$

(9.2)

Other CNO Business segment:

In-Force Business

$

2.6

$

1.9

$

6.2

$

(.4)

New Business

—

—

—

—

   Total

$

2.6

$

1.9

$

6.2

$

(.4)

Total Business segments:

In-Force Business

$

155.6

$

149.9

$

293.8

$

278.8

New Business

(40.9)

(37.4)

(89.4)

(83.2)

   Total EBIT from business segments

$

114.7

$

112.5

$

204.4

$

195.6

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

SEGMENT OPERATING RESULTS

(Dollars in millions, except per share data)

Six months ended

June 30,

2013

2012

EBIT (4):

Bankers Life

$

141.2

$

146.6

Washington National

61.2

58.6

Colonial Penn

(4.2)

(9.2)

Other CNO Business

6.2

(.4)

   EBIT from business segments

204.4

195.6

Corporate Operations, excluding corporate interest expense

5.4

(10.9)

   EBIT

209.8

184.7

Corporate interest expense

(28.2)

(34.1)

   Operating earnings before tax

181.6

150.6

Tax expense on operating income

64.2

55.8

   Net operating income (1)

117.4

94.8

Net realized investment gains (net of related amortization and taxes)

11.2

32.8

Fair value changes in embedded derivative liabilities (net of related amortization and taxes)

13.4

(2.4)

Equity in earnings of certain non-strategic investments and earnings attributable to non-

controlling interests (net of taxes)

(4.5)

—

Loss on extinguishment of debt (net of taxes)

(64.0)

(.4)

   Net income before valuation allowance for deferred tax assets

73.5

124.8

Valuation allowance for deferred tax assets

15.5

—

   Net income

$

89.0

$

124.8

Per diluted share:

Net operating income

$

.50

$

.35

Net realized investment gains (net of related amortization and taxes)

.05

.11

Fair value changes in embedded derivative liabilities (net of related amortization and

taxes)

.06

(.01)

Equity in earnings of certain non-strategic investments and earnings attributable to non-

controlling interests (net of taxes)

(.02)

—

Loss on extinguishment of debt (net of taxes)

(.27)

—

Valuation allowance for deferred tax assets

.06

—

   Net income

$

.38

$

.45

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

NET OPERATING INCOME EXCLUDING A SIGNIFICANT ITEM*

(Dollars in millions, except per share data)

Three months ended

June 30, 2012*

Actual

results

Significant

item

Excluding

significant

item

Net Operating Income (1):

Bankers Life

$

76.1

$

(3.6)

$

72.5

Washington National

33.9

—

33.9

Colonial Penn

.6

—

.6

Other CNO Business

1.9

—

1.9

   EBIT from business segments

112.5

(3.6)

108.9

Corporate Operations, excluding corporate interest expense

(9.1)

—

(9.1)

   EBIT (4)

103.4

(3.6)

99.8

Corporate interest expense

(16.6)

—

(16.6)

   Operating earnings before tax

86.8

(3.6)

83.2

Tax expense on operating income

32.6

(1.3)

31.3

   Net operating income

$

54.2

$

(2.3)

$

51.9

Net operating income per diluted share

$

.20

$

(.01)

$

.19

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

COLLECTED PREMIUMS

(Dollars in millions)

Three months ended

June 30,

2013

2012

Bankers Life segment:

Medicare supplement

$

189.2

$

192.3

Long-term care

133.2

138.8

Supplemental health

2.2

.2

Life

91.1

75.4

Annuity

183.7

169.5

   Total

599.4

576.2

Washington National segment:

Supplemental health

121.9

115.4

Medicare supplement and other health

25.7

29.7

Life

3.4

3.8

   Total

151.0

148.9

Colonial Penn segment:

Life

56.4

52.5

Supplemental health

1.0

1.2

   Total

57.4

53.7

Other CNO Business segment:

Life

39.5

40.9

Annuity

1.5

1.2

Other health

6.2

6.5

   Total

47.2

48.6

      Total collected premiums

$

855.0

$

827.4

NEW ANNUALIZED PREMIUMS (2)

(Dollars in millions)

Three months ended

June 30,

2013

2012

Bankers Life segment:

Medicare supplement

$

19.0

$

19.9

Long-term care

6.5

7.8

Supplemental health

2.7

.8

Life

24.2

20.9

Annuity

10.8

10.1

   Total

63.2

59.5

Washington National segment:

Supplemental health

21.3

20.3

Medicare supplement

—

.2

Life

1.9

1.7

Annuity

.1

.1

   Total

23.3

22.3

Colonial Penn segment:

Life

15.8

15.6

   Total

15.8

15.6

      Total new annualized premiums

$

102.3

$

97.4

CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES

BENEFIT RATIOS ON MAJOR HEALTH LINES OF BUSINESS

Three months ended

June 30,

2013

2012

Bankers Life segment:

Medicare Supplement:

Earned premium

$189 million

$184 million

Benefit ratio (7)

67.2

%

72.2

%

PDP:

Earned premium

$11 million

$18 million

Benefit ratio (7)

85.2

%

64.2

%

Long-Term Care:

Earned premium

$134 million

$140 million

Benefit ratio (7)

129.5

%

121.4

%

Interest-adjusted benefit ratio (a non-GAAP measure) (8)

81.4

%

75.4

%

Washington National segment:

Medicare Supplement:

Earned premium

$26 million

$30 million

Benefit ratio (7)

65.5

%

67.7

%

Supplemental health:

Earned premium

$119 million

$113 million

Benefit ratio (7)

78.6

%

77.0

%

Interest-adjusted benefit ratio (a non-GAAP measure) (8)

52.6

%

50.1

%

NOTES

(1)

Management believes that an analysis of Net income applicable to common stock before: (i) net realized investment gains or losses, net of related amortization and taxes; (ii) fair value changes due to fluctuations in the interest rates used to discount embedded derivative liabilities related to our fixed index annuities, net of related amortization and taxes; (iii) equity in earnings of certain non-strategic investments and earnings attributable to non-controlling interests, net of taxes; (iv) loss on extinguishment of debt, net of taxes; and (v) changes in the valuation allowance for deferred tax assets ("Net operating income," a non-GAAP financial measure) is important to evaluate the financial performance of the company, and is a key measure commonly used in the life insurance industry.  Management uses this measure to evaluate performance because the items excluded from net operating income can be affected by events that are unrelated to the company's underlying fundamentals.  Net realized investment gains or losses include: (i) gains or losses on the sales of investments; (ii) other-than-temporary impairments recognized through net income; and (iii) changes in fair value of certain fixed maturity investments with embedded derivatives.  A reconciliation of Net operating income to Net income applicable to common stock is provided in the tables on pages 2 and 9.  Additional information concerning this non-GAAP measure is included in our periodic filings with the Securities and Exchange Commission that are available in the "Investors - SEC Filings" section of CNO's website, www.CNOinc.com.

(2)

Measured by new annualized premium, which includes 6% of annuity and 10% of single premium whole life deposits and 100% of all other premiums.  Medicare Advantage and Private-Fee-For-Service sales are not comparable to other sales and are therefore excluded in all periods.

(3)

The calculation of this non-GAAP measure differs from the corresponding GAAP measure because accumulated other comprehensive income (loss) has been excluded from the value of capital used to determine this measure.  Management believes this non-GAAP measure is useful because it removes the volatility that arises from changes in the unrealized appreciation (depreciation) of our investments.  The corresponding GAAP measures for debt-to-total capital were 16.5% and 16.6% at June 30, 2013 and December 31, 2012, respectively.

(4)

Management believes that an analysis of earnings before net realized investment gains (losses), fair value changes due to fluctuations in the interest rates used to discount embedded derivative liabilities related to our fixed index annuities, equity in earnings of certain non-strategic investments and earnings attributable to non-controlling interests, corporate interest expense, loss on extinguishment of debt and taxes ("EBIT," a non-GAAP financial measure) provides a clearer comparison of the operating results of the company quarter-over-quarter because these items are unrelated to the company's underlying fundamentals.  A reconciliation of EBIT to Net Income applicable to common stock is provided in the tables on pages 2 and 9.

(5)

Book value per diluted share reflects the potential dilution that could occur if outstanding stock options and warrants were exercised, restricted stock and performance units were vested and convertible securities were converted.  The dilution from options, warrants, restricted shares and performance units is calculated using the treasury stock method.  Under this method, we assume the proceeds from the exercise of the options and warrants (or the unrecognized compensation expense with respect to restricted stock and performance units) will be used to purchase shares of our common stock at the closing market price on the last day of the period.  The dilution from convertible securities is calculated assuming the securities were converted on the last day of the period.  In addition, the calculation of this non-GAAP measure differs from the corresponding GAAP measure because accumulated other comprehensive income (loss) has been excluded from the value of capital used to determine this measure.  Management believes this non-GAAP measure is useful because it removes the volatility that arises from changes in the unrealized appreciation (depreciation) of our investments.  The corresponding GAAP measures for book value per common share were $20.88 and $22.80 at June 30, 2013 and December 31, 2012, respectively.

(6)

Management believes that an analysis of EBIT, separated between in-force and new business provides increased clarity around the value drivers of our business, particularly since the new business results are significantly impacted by the rate of sales, mix of business and the distribution channel through which new sales are made.  EBIT from new business includes pre-tax revenues and expenses associated with new sales of our insurance products during the first year after the sale is completed.  EBIT from in-force business includes all pre-tax revenues and expenses associated with sales of insurance products that were completed more than one year before the end of the reporting period.  The allocation of certain revenues and expenses between new and in-force business is based on estimates, which we believe are reasonable.

(7)

The benefit ratio is calculated by dividing the related product's insurance policy benefits by insurance policy income.

(8)

The interest-adjusted benefit ratio (a non-GAAP measure) is calculated by dividing the product's insurance policy benefits less imputed interest income on the accumulated assets backing the insurance liabilities by insurance policy income.  Interest income is an important factor in measuring the performance of longer duration health products.  The net cash flows generally cause an accumulation of amounts in the early years of a policy (accounted for as reserve increases), which will be paid out as benefits in later policy years (accounted for as reserve decreases).  Accordingly, as the policies age, the benefit ratio will typically increase, but the increase in the change in reserve will be partially offset by the imputed interest income earned on the accumulated assets.  The interest-adjusted benefit ratio reflects the effects of such interest income offset.  Since interest income is an important factor in measuring the performance of these products, management believes a benefit ratio, which includes the effect of interest income, is useful in analyzing product performance.  Additional information concerning this non-GAAP measure is included in our periodic filings with the Securities and Exchange Commission that are available in the "Investors - SEC Filings" section of CNO Financial's website, www.CNOinc.com.