Insurance Customer Lawsuits Dog CNO

CNO Financial Group appears to have wrapped its arms around the cost of settling a trio of consumer lawsuits involving life insurance rate hikes, but it's not out of the woods yet.

At least six other suits pending in federal court allege breach of contract involving its life and health policies.

The outcome could weigh on CNO's ongoing transition from its predecessor, Conseco Inc., into a stronger company with an improved credit profile and more earnings power. CNO recently completed a recapitalization that improves its debt outlook and saves millions of dollars in interest costs.

But just last month, Carmel-based CNO announced an additional charge of $21 million toward the anticipated cost of settling the three suits filed by customers of older CNO life insurance units that no longer market policies.

That charge brought to $41 million the reserves CNO has established this year toward the litigation.

Asked by an analyst last month how close the reserve gets to settling the litigation, Bonach replied, "It does represent a significant step towards resolving" the legal woes of the company's so-called "other CNO business" segment.

That segment is primarily made up of operations that no longer actively sell annuities, life and health insurance. The segment includes a number of companies acquired by CNO predecessor Conseco, such as Massachusetts General Life.

Conseco filed for bankruptcy nearly a decade ago and emerged as CNO, which today relies on its core units Chicago-based Bankers Life, along with insurers Washington National and Colonial Penn.

Under those core units and after dropping the Conseco name in 2010, CNO has focused on middle-income Americans near or in retirement. It wants to be the place they go for life insurance and supplemental health policies.

Some of those core entities are also the subject of litigation.

In April, CNO agreed to pay $9.9 million to settle allegations by regulators in four states - Maine, Missouri, New Hampshire and Vermont - that Bankers Life acted as an investment adviser and broker-dealer without proper licensing.

And on Nov. 20, the Pennsylvania Department of Insurance announced that CNO will pay a $4 million fine to settle multistate litigation stemming from a reexamination of Bankers Life.

"Our examination determined that Bankers failed to comply with a number of recommendations from a prior exam report," Pennsylvania's Insurance Commissioner Michael Consedine said.

Regulators said Bankers Life failed to conduct timely claims settlements in its annuities, long-term-care and life insurance lines.

The other lead states in the settlement were Indiana, Illinois, Florida and Texas.

Eyeing middle-income America

Bonach, who has been CEO of CNO for just over a year, told IBJ the company has been working to improve operations at its core and legacy units to better interact with consumers. The old company had more than a dozen subsidiaries, each with its own systems.

CNO has been working to improve policy administration and processes.

"We still do have, because of our past, a number of administrative systems and procedures that can be unified across the enterprise, making it easier for the customer to deal with us," he said.

It's also been trying to become more involved in the community and to position itself as an "employer of choice" that can draw top talent.

Bonach wants to make CNO attractive to working-class consumers, a market he says is "still vastly underserved and growing quite rapidly."

But that could be harder if the company doesn't first deal with some of its older lines of business that are coming back to haunt it.

The trio of suits CNO is attempting to settle in federal court in California includes one filed by Daniel Nicholas, who held a universal life policy originally issued by Massachusetts General Life.

Nicholas' class action suit alleges that rates may be increased only if Conseco's "expectations as to future mortality experience worsens."

He alleges Conseco did not see such unfavorable conditions on the horizon, yet it dramatically increased rates to boost profits.

The insurer late last year told policyholders the increased cost to consumers was due to an "economic downturn that began several years ago, significantly diminished investment yields, and mounting policy losses that substantially exceeded earlier projections," but not that mortality rates had worsened, according to the suit.

Nicholas stated that the "extremely dramatic and shocking" cost of insurance would jack up his premium from $1,800 a year to $12,803.

His complaint alleges that Conseco dramatically raised premiums to induce policyholders to surrender their policies for more profitable ones issued by the company - or allow their policies to lapse. The latter would ensure the company wouldn't pay death claims.

Nicholas seeks unspecified compensatory damages for policyholders and a halt to increases in what the consumer pays.

Last April, CNO announced it had reached a tentative settlement with Nicholas and took a pretax charge of $20 million.

"While the company believes its estimates are adequate to cover these costs, the estimates are subject to significant judgment, and it is possible that the estimates will prove insufficient to cover the actual costs," CNO said in its most recent 10-Q.

Newer complaints

A new suit involving cost-Of-insurance increases was filed last month in U.S. District Court for the Central District of California by two former Conseco life insurance policyholders.

One of them, North Carolina resident Joseph Camp, 63, surrendered his policy in 2009 after being informed Conseco would impose a cost-of-insurance deduction of $727 a month, and that his $500,000 policy was underfunded by more than $78,000.

Last year, a court handling a multidistrict litigation case involving several suits against Conseco ruled that former policyholders could not be included in a class of plaintiffs suing the insurer for cost-ofliving increases.

Camp's suit seeks to have that class of former policyholders covered and alleges breach of contract.

CNO said the case is without merit.

A CNO spokesman said CNO has already established reserves for the roughly half dozen of the more recent cases, but that the total amount is significantly less than the $41 million for the three California cases under tentative settlement.

During an earnings call with analysts last month, Bonach, when asked if there was other significant pending litigation, said, "We do not have any current or other significant outstanding litigation" involving the other CNO business lines.

"The two main headwinds currently faced by CNO Financial Group are the low-interest-rate environment, which has taken a bite out of most insurers' profitability, and the company-specific litigation it faces in its other CNO Business unit," BTIG Research analyst Mark Palmer said in a recent report.

Evidence of those challenges is found in CNO's third-quarter operating profit of 11 cents a share versus a consensus of 19 cents.

Besides the $21 million charge for litigation reserve, the company took an after-tax third-quarter charge of $27.5 million based on a review of actuarial assumptions reflecting the low-interest-rate environment, Palmer noted.

Goldman Sachs analyst Christopher Giovanni in a report issued last month said CNO nevertheless showed solid results in its operating segments, including Bankers Life.

He said a settlement of the three suits would pave the way for reinsurers to buy blocks of business in "a low-returning, highly volatile segment."

Bonach told IBJ there may be such opportunities, which "would bring more certainty and stability to the business."

When tax effects are factored in, CNO had a third-quarter loss of $5 million, or 2 cents a share, compared with a profit of $179.5 million, or 61 cents a share, in the same quarter last year.

Earnings were banged up most by a $176.4 million after-tax charge related to refinancing of debt earlier in the year to strengthen its balance sheet.

The company's stock hit a four-year high in September of just over $10 a share after the company announced it would repay debt to reduce borrowing costs. Lately, the stock has been trading just shy of $9 a share.

Litany of litigation

CNO Financial has set aside $41.5 million in reserves for potential settlement payouts in lawsuits 1-3 below. It also faces newer complaints, including 4 and 5.

1. March 2008

Plaintiff: Dr. Celedonia X.Yue

Defendant: Conseco Life Insurance Co.

Court: U.S. District Court for Central District of California

Allegation: breach of contract over planned rate increase

Status: In 2009, court OK'd class action status. In 2010, Conseco Life decided not to implement rate hike. But court issued declaratory judgment advising what company could consider in future rate increases. Conseco Life is appealing.

2. November 2011

Plaintiff: Dr. Celedonia X. Yue

Defendant: Conseco Life

Court: U.S. District Court for Central District of California

Allegation: broader complaint from Yue that alleges policyholders will be damaged by insurance hike issued that year

Status: tentative settlement

3. February 2012

Plaintiff: Daniel B. Nicholas, seeking class action status

Defendant: Conseco Life

Court: U.S. District Court for Northern District of Illinois

Allegation: breach of contract over rate increase due to economic downturn, diminished investment yields and increased policy losses

Status: In April, CNO and Nicholas reached tentative settlement. In May, court granted motion to intervene by Yue, transferring case to U.S. District Court for Central District of California. CNO recorded $20 million pretax charge for Nicholas settlement. On Sept. 30, CNO recorded $21 million pretax charge for Yue case.

4. August 2012

Plaintiff: Fay Glick, seeking class action

Defendant: Bankers Life

Court: U.S. District Court for District of Massachusetts

Allegation: systematic practice of delaying or denying payment of claims for health insurance policies

Status: pending

5. October 2012

Plaintiffs: Jeffrey Burnett, Joe H. Camp

Defendants: Conseco Life, CNO Financial Group

Court: U.S. District Court for Central District of California

Allegation: breach of contract involving former life insurance customers who surrendered or let lapse policies following "massive" rate increases in 2008

Status: pending