Good morning. My name is Tamika, and I will be your conference operator today. At this time, I would like to welcome everyone to the impact of implementing ASU 2010-26 on 2011 and prior period. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you, Mr. Goldberg. You may begin your conference, sir.
Thank you, operator. Good morning, and thank you for joining us on CNO Financial Group's conference call on the impact of implementing ASU 2010-26 on years 2011 and prior periods. Today's presentation will include remarks from Fred Crawford , our Chief Financial Officer, and John Kline , our Chief Accounting Officer. Following the presentation, we will also have several other business leaders available for the question-and-answer period. This presentation and a restated financial supplement were filed in a Form 8-K yesterday and are also available in the investor section of our website at www.cnoinc.com. Let me remind you that any forward-looking statements we make today are subject to a number of factors which may cause actual results to be materially different than those contemplated by those forward-looking statements. Today's presentation contains a number of non-GAAP measures which should not be considered as substitutes for the most directly comparable GAAP measures.
Now I'd like to turn the call over to our CFO, Fred Crawford . Fred?
Thanks, Scott. Good morning, everyone, and thank you for joining us on the call today. In December of last year, we hosted a call to disclose our estimated impact of implementing the new DAC accounting standard known as ASU 2010-26. The purpose of today's call is to provide additional information on the impact to CNO's historical results, focused primarily on 2011. Our hope is this will allow you a jump start on understanding the impact such that we can focus our attention on core performance next week. Importantly, we will not be commenting on or answering questions pertaining to the first quarter results on this call. We furnished a copy of our fourth quarter 2011 financial supplement, which restates our results for both 2010 and 2011. John will help you navigate the new disclosures we think will be helpful in understanding the earnings drivers in our business post-adoption.
First and foremost, there is no change in the economics of our business due to the implementation of the new guidance. This is a GAAP accounting change only, and there is no change to statutory financials and the core cash flow and capital-generating capacity of CNO. The adoption has no impact on our debt covenants, capital deployment plans, and priorities. As we discussed during our December call, the change does impact the GAAP earnings of each of our four business segments differently. In the extreme, Colonial Penn significantly impacted by the expensing of most direct marketing costs, as contrasted with OCB, our runoff business, where there is obviously little impact. It's also worth reminding investors why CNO's GAAP earnings are, in some cases, disproportionately impacted. First, our fresh start accounting from 2003 resulted in a sizable present value future profits or PVFP asset.
Although similar to DAC, this asset is not being impacted by the adoption. CNO will therefore have less of a book value decrease upon adoption. However, the PVFP amortization will continue to have a negative but diminishing impact on future earnings. Second, our business model is unique in the industry and a real strength of CNO. However, our model is not advantaged under the new accounting. The direct marketing platform of Colonial Penn is impacted the most as a percent of their segment earnings due to the significantly reduced deferral of direct advertising costs. The Bankers Life's career distribution model is negatively impacted as compared to third-party distribution. Finally, we are more actively investing in the business model and expect sales growth to outpace much of the market. A good kind of problem, but impacting our earnings on the margin.
All of this underscores why we believe understanding GAAP in-force results are critical in assessing our underlying performance and value creation over the long run. Going forward, we will include a bifurcation between in-force and new business profits as part of our reporting. Slide six details the consolidated GAAP impact of implementing the new accounting standard on a restated basis for 2011. These numbers are substantially the same as our year-end estimates, with a slightly reduced book value impact. Net income decreased by $47 million, and operating EPS decreased by $0.15 per diluted share. Book value, excluding AOCI, decreased by $575 million, or $1.93 per diluted share. Consolidated ROE decreased by 30 basis points.
Of interest, had PVFP been treated the same as DAC, our year-end 2011 book value would have decreased by an additional $259 million, and our restated operating EPS would have decreased by only $0.05 per share. However, our restated ROE would have actually increased by 140 basis points. Turning to slide seven, as I mentioned at the outset of the call, the changes from the new pronouncement will impact GAAP financials only. Statutory tax, cash generation, and most importantly, our capital strategy are all unchanged. On slide seven, you can see the 2010 and 2011 statutory earnings and cash generation of the company, as contrasted with the reported pre-tax GAAP operating income results for the same periods on both a pre and post-implementation basis.
Pausing to reflect on our cash flow dynamics, pre-tax statutory income, as well as the amount of cash moved up to the holding company, has been steadily building. Statutory income is the primary driver of dividend capacity from the insurance subsidiaries. In addition to dividends, the holding company also generates cash from interest payments on intercompany surplus notes, plus fees for investment and administrative services provided to the insurance companies that annually total approximately $140 million. There will be zero disruption to these important cash flow mechanics with the adoption of the new DAC standard. With the new DAC adoption and further changes to GAAP accounting on the horizon, we expect investors to move towards valuing companies on statutory and free cash flow metrics. We will continue to focus much of our financial reporting and analysis on the capital-generating dynamics of our business model.
Now to take a bit of a deeper dive into the restated impacts, I'd like to turn the call over to our Chief Accounting Officer, John Kline . John?
Thanks, Fred. The chart on slide eight shows GAAP EBIT from our business segments for 2010 and 2011 as restated for the DAC change and split by in-force and new business results. It's important to note that the year-over-year earnings are impacted by many drivers in addition to the impact of the new pronouncement, including investment performance, persistency of our business, and morbidity and mortality experience. However, the new DAC accounting can have a significant impact on results depending on the level of sales, the products being sold, and the distribution channel through which sales are made. As you can see, our year-over-year EBIT from in-force business increased by approximately $105 million. The pre-tax loss generated from new business increased by $40 million, and the overall EBIT from both in-force and new business increased by $65 million.
Note that the overall EBIT increased by $65 million, even though we increased the GAAP expense related to our investment in new business by $40 million. If you hold all else equal, namely the pace and mix of investment in new business, the impact of the new pronouncement on earnings diminishes over time. This is primarily due to the impact of fresh start accounting, which was implemented as the company came out of bankruptcy in late 2003. As a result of this accounting, the earnings from our pre and post-fresh start blocks are very different. The historical balance of PVFP associated with the pre-fresh start block did not change as a result of the new accounting, and accordingly, its amortization is higher and earnings are lower relative to the DAC block.
As the DAC block grows and the pre-fresh start block gets smaller, the earnings from the in-force block will increase as it did in the 2010-2011 period. The amount and mix of our investment in new business will impact EBIT and EBIT from new business in particular. Costs related to acquiring new business are significant in the first year, and under the new DAC rules, a significant portion of these costs are no longer deferrable. Consequently, the significant growth in our business will result in higher expenses and lower EBIT. Before we leave this slide, note our 2010 and 2011 statutory pre-tax earnings summarized at the bottom. Under statutory accounting rules, costs related to new business are not deferred. Accordingly, GAAP earnings are now more closely aligned with statutory earnings.
Slide nine shows the impact of the adoption of the new pronouncement on our consolidated EBIT for the year ended December 31, 2011, broken down by line item. It's important to note that earnings before amortization and acquisition expenses remains unchanged. On the left side of the table are the results before the DAC change, and on the right side are the results restated for the DAC change in total, and then split between in-force and new business. By separating the income statement between new and in-force business, you can see the impact on earnings resulting from a significant portion of our acquisition cost no longer being deferred, partially offset by a reduction in the amortization cost as a result of a lower DAC balance.
Focusing on the amounts presented in the blue box toward the bottom of the table, you can see that amortization cost was reduced from $445 million to $306 million in 2011 as a result of adopting the new standard. However, the $208 million increase in non-deferrable acquisition costs exceeded the reduction in amortization costs. As our post-fresh start block grows, the difference between these two amounts will decrease, and the impact on our total net income will be smaller. Note the amount that is circled at the bottom of the far right-hand column. This $163 million pre-tax loss represents the net GAAP expense related to the investment we made during 2011. The amount of this loss is sensitive to the amount we invest to generate new business.
For example, if we chose to invest $10 million in additional TV advertising to generate additional sales of Colonial Penn's life products, the pre-tax loss from new business would increase by $10 million. The amount of our investment will impact the in-force earnings we report in future periods. Slide 10 is a summary of the impact of the adoption of the new pronouncement on the various components of our DAC balance, calculated on a restated basis as of December 31, 2011. As you can see, much of the overhead labor and direct response advertising costs, which were previously deferred, are no longer deferred under the new standard. A significant portion of the costs which are no longer deferred relate to the cost of maintaining our career agency force in the Bankers Life segment.
In understanding the relative impact of the new standard on CNO, it is important to note that similar costs are reimbursed to independent agents through higher sales commissions, which are deferrable under the new standard. In addition, we are no longer able to defer the majority of direct response advertising costs at Colonial Penn, which have consistently generated predictable sales and future profits. It's important to note that having a high percentage of DAC reduction does not mean CNO was aggressive in capitalizing DAC under the old guidance. Business mix and distribution models have a significant impact on the amount of the DAC reduction. Slide 11 is a summary of EBIT by segment for 2011.
On the left side of the table are the results before the DAC change, on the right side are the results restated for the DAC change in total, then split between in-force and new business. This summary clearly illustrates how the DAC change impacts each of our four business segments differently. Bankers Life EBIT was reduced from $327 million to $291 million. As a result of Bankers Life growth and the additional non-deferrable costs incurred for its career agency force, its earnings are moderately impacted. Washington National EBIT only decreased $3 million. The impact on Washington National is much lower given the higher level of cost deferrable under its distribution model.
Colonial Penn will record a loss under the new standard given the investment we are making in its new business growth and the fact that nearly all of the costs it incurs to put new business on the books are no longer deferrable. It's important to note that the segment in-force block is very profitable with EBIT of $40 million. The impact on the Other CNO Business segment reflects a reduction to its DAC balance and the absence of investment in new business as we continue to focus on managing this runoff block. Slide 12 details additional disclosures that we will be making going forward as a result of the adoption of the new accounting standard. The most important one is the bifurcation of results between in-force and new business, as illustrated on the previous slides.
The bifurcation results in greater clarity around value drivers, particularly as the new business results are impacted by the rate of sales, the mix of new business, and the distribution channels through which sales are made. On our quarterly earnings releases, investor presentations, financial supplements, Forms 10-Q and 10-K, we'll disclose our results on this bifurcated basis. Also to help explain the impacts of the new DAC accounting standards, we'll also show our results on a pro forma basis before the impact of the new standard during the first year of adoption. Yesterday, we filed a Form 8-K, which includes our restated 4-Q 2011 quarterly financial supplement, which is also available in the investor section of our website.
In addition to the historical amounts presented on a restated basis for all quarters in 2010 and 2011, the supplement also presents EBIT split between in-force and new business on a consolidated basis, as well as summarized for our four business segments. With that, I'll pass it back to Fred for some final comments.
Thanks, John. The key takeaway from today's call is to reiterate that this is a GAAP accounting change only, and the economics of the business are not impacted. The new guidance does impact the GAAP results of each business segment differently, and CNO is, in some cases, disproportionately impacted. All else held equal in terms of sales trends, much of this difference is simply the timing on earnings recognition and will diminish over time. Management is exploring ways to mitigate the impact of the new accounting standard, potentially modifying certain commission and compensation arrangements so they are directly related to the successful acquisition of new business, as well as exploring reinsurance and other related solutions. Our current view is any actions we take may improve reported earnings only on the margin.
We will not put in place structures that hurt economic value or disrupt our business model for the sake of better GAAP optics. At the end of the day, we are focused on building free cash flow for reinvestment in our business model and returning capital to our shareholders. Consistent with these goals, we have adopted in-force profitability as an additional metric in our incentive compensation programs. We believe this measure aligns with long-term value creation with each year's new business yielding in-force performance for years to come. Reporting on both in-force and new business profits should lead to a better understanding of the long-term value drivers at CNO, along with renewed investor focus on statutory results, free cash flow, and understanding overall product returns. With that, I'll open it up for questions. Operator?
At this time, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Again, to ask a question, please press star then the number one. There are no questions at this time, sir.
Great. Well, thank you. Hopefully, that reflects the clarity of the presentation material delivered today. This is a recorded call, obviously. Hopefully you'll find the information that we supplied yesterday evening, together with the recorded version of this call, helpful to all of you as we creep towards the first quarter announcement and move through 2012. Thank you all for joining us, and we look forward to talking next week