CNO Financial Group, Inc. · NYSE:CNO
CNO Financial — 2013 Life Insurance Conference
29 slides from CNO Financial's conference presentation, Apr 16, 2013
Slide 1: 2013 Life Insurance Conference
2013 Life Insurance Conference APRIL 16, 2013
Slide 2: Eric Johnson Background
Eric Johnson Background Harvard University, B.A. cum laude, American History Manufacturers Hanover Trust Company NatWest Capital Markets CNO Financial Fi i l Group G – EVP and d Chief Chi f IInvestment t t Offi Officer 2 non non-profit profit boards 2 teen mentoring gpprograms g CNO Fina
Slide 3: U.S. Economic Outlook
U.S. Economic Outlook Unemployment p y U.S. data remains g generally yppositive, but not 12% Unemployment 10% positive enough to resolve uncertainty Expect consumer spending to slow due to 10% Long Term Unemployment 8% lagged response to January’s tax increases, and the sequestration cuts ment 8
Slide 4: U.S. Economic Outlook
U.S. Economic Outlook Headline and Core CPI Retail Sales Ex. Food and Consumer Confidence 15% 120 $390 13% Headline CPI $340 Consum 11% 100 Core CPI Retail Sales ($$Bn) 9% $290 mer Confidencee 7% CPI 80 5% $240 3% 60 1% $190 Retail Sales -1% Consumer C Confidence C fid -3% Fed Target: 2% $140 40 Cor
Slide 5: Interest Rate Outlook
Interest Rate Outlook U.S. Treasury y Yields Rates are range g bound BOJ JCB purchases have potential to exert 3% sizeable demand effect 30 Yr. Contained underlying U.S. inflation is the most aturity consistent data trend 2% Yield to Ma 10 Yr. Drag from fiscal deal and sequester likely to ma
Slide 6: Inside the Yield Curve
5% Inside the Yield Curve Potential for inflation/rising rates 4% Return requirements Liquidity preference 3.13% 3% “Belly” Rolldown return C Carry trade t d Best value Low repo rates 2% QE3 1.86% C t l swap Central clearing demand for collateral 1% 0.76% 0.24% 0% 1 yr. 2 yr. 3 yr.
Slide 7: 2013 YTD Broad Asset Class Total Returns
2013 YTD Broad Asset Class Total Returns Rates Commodities 2% 0.5% 0.4% 2% 0.2% 0% 0% -2% -0.4% -0.4% -2% -4% 4% -4% 4% -3.3% -3.3% -6% -6% -4.2% -5.3% -5.6% -8% -6.8% -8% -7.9% -10% -10% Credit Risk 12% 12% 9.7% 9% 9% 6.5% 6% 6% 4.4% 2.5% 3.1% 2.2% 2.2% 1.8% 1.4% 3% 3% 0.8% 0.7% 0.9% 0.2% % 0% 0% -
Slide 8: Investment Grade Corporates
Investment Grade Corporates Yields by y Rating g Limited differentiation for risk 10% AA Corp Default losses virtually irreducible A Corp 8% High degree of price exposure to rising rates BBB Corp aturity Low all in rates not favorable to spreads 6% Event E t risk i k is i substantial b t t
Slide 9: High Yield Corporates
High Yield Corporates Yields by y Rating g Limited capacity p y for further spread p tightening g g 35% Lower quality grades disproportionately BB Corp 30% exposed to uncertainties in economic B Corp fundamentals 25% aturity CCC Corp Macro correlation likely to decline meaning 20% Yield to Ma
Slide 10: Commercial Mortgage Backed Securities
Commercial Mortgage Backed Securities AAA Last Cash Flow vs AA CMBS • Continued negative g net supply pp y 120 • Cap rates attractive vs. fixed income with some 110 inflation protection • Recent increases in IO loan underwriting aturity 100 • Recovering CRE values leveraging down 90 Yield to Ma coll
Slide 11: Non-Agency RMBS
Non-Agency RMBS Loss Adjusted j Yields Negative net supply 20% Focus on bonds leveraged to housing 18% recovery Prime High proportion of short sales is reducing 16% liquidation discount 14% Alt-A Derivatives and leverage necessary to meet Yield 12% investor return targets 10% Positive HPA
Slide 12: Agencies
Agencies Yield and Spread p to Treasury y • Despite p very y favorable technicals,, lackluster 8% performance due to policy and prepayment risk FNCL • Increase in mortgage banking capacity should 6% Basis leverage up prepays aturity • Structural uncertainty – regulation, capacity, 4% QE3 credit stan
Slide 13: Collateralized Loan Obligations
Collateralized Loan Obligations Loan Default Rates and Senior O/C / Ratio • Broadening g CLO investor base and g growing g 16% 130 product demand Default Rates 14% • Tested structural integrity and ratings Senior O/C Ratio 126 12% stability Seniorr O/C Ratio • Higher FDIC risk assessments may inhibi
Slide 14: Commercial Mortgage Loans
Commercial Mortgage Loans Life Industry y Loan Origination g and Yields 9% • Dramatic improvement in CBD $60 $ Life Industry Origination credits – cash flows, LTV’s Average Yield 8% • Negative long term trends in n ($Bn) Yield $40 7% % suburban office, tertiary y markets, d to Maturity Origination r
Slide 15: EM Corporates
EM Corporates Corporate p and Diversified EM • Economic g growth g generally y disappointing pp g 18% 4% leading to somewhat higher downside risks JPM CEMBI 15% JPM EMBI • Expect EM investment strategy to shift away BBB Corp 3% from carry due to declining correlations CEMB aturity 12% CEMBI - BBB Co
Slide 16: Municipals
Municipals Average g Life Industry y Muni Allocation • Tax revenues g growingg slowlyy but have y yet to 4% achieve pre-recession levels • Total muni defaults/bankruptcies have remained very low relative to other asset classes d Assets 3% • California and Illinois (25% of the taxable muni index)) cu
Slide 17: What Will Turn the Markets?
What Will Turn the Markets? Policy Mistake Global Deflation Sovereign Debt/Banking Contagion Middle East Political Tensions Major Trading Error Risk Asset Bubbles GSE Exit Mistake CNO Financial Group | 2013 Life Insurance Conference | April 16, 2013 17
Slide 18: Credit Spreads, 1/1/2005-Present
Credit Spreads, 1/1/2005-Present Low High g AA Corps 41 491 76 A Corps 56 595 113 BBB Corps 105 770 181 BB Corps 146 1,375 330 B Corps 221 1,858 467 EM Corp IG 87 884 190 EM Corp HY 169 1,341 498 Municipals 43 359 169 CLO 24 535 122 CMBS AM 60 1,200 320 CMBS A4 55 650 75 Esoteric ABS 15 1,450 225 Su
Slide 19: Investible Capital Markets Matrix
Investible Capital Markets Matrix 10% 9% CCC Corp 8% 7% B Corp 6% EM HY Yield to Maturiity CMBS AJ 5% BB Corp CLO BBB Subprime BIG Alt-A BIG CMBS C EM Sov. 4% Munis Prime BIG Y BBB Corp CLO A 3% EM IG CMBS D A Corp AA Corp 2% CMBS AM CLO AAA Alt-A IG 1% CMBS A4 Prime IG Subprime IG 0% 0 AAA 1 AA 2 A
Slide 20: Life Industry Impacts
Life Industry Impacts Average g Life Industry y Portfolio Yields* and ROE 7.5% 16% Yield Reduced consumer confidence - 7.0% ROE 12% leads to lower sales Portfolio Yield 6.5% ROE R 8% 6.0% Group life benefits negatively impacted by employment trends 4% 5.5% 5.0% 0% Pressure on annuity sales, es
Slide 21: The Interest Rate Conundrum
The Interest Rate Conundrum Market Value If rates return, compression risk lessens but disintermediation may increase Spread Compression Risk If rates remain low low, compression risk materializes Fully immunized risk – practical Assets impossibility Disintermediation Liabilities Risk Today i
Slide 22: ALM Issues Today
ALM Issues Today Reinvestment assumptions Growing the asset mix Changing investment liquidity Distributable earnings – susceptible to non-continuous jumps Setting the ‘right’ objective functions Stakeholder communication CNO Financial Group | 2013 Life Insurance Conference | April 16, 20
Slide 23: Product Management Issues Today
Product Management Issues Today Levers Constraints Pricing Competition Product Features Regulation Agent Comp Reputation Expense Assumptions Franchise Crediting Rates Expense Leverage Sales Mix CNO Financial Group | 2013 Life Insurance Conference | April 16, 2013 23
Slide 24: Investment Actions
Investment Actions Allocation to Alternatives Allocation to Mortgage g g Loans 4% 10.2% d Assets d Assets 3% 10.0% % of Invested % of Invested 2% 9.8% 1% 9.6% 0% 9.4% Allocation to Treasuries and Agencies Allocation to NAIC 2 10% 35% % of Invessted Assets 8% % of Investeed Assets 30% 6% 25% 4% 20% 2
Slide 25: Investment Actions - Value of Duration
Investment Actions - Value of Duration 140 20 Yr. Avg. 120 10 Yr. Avg. 5 Yr. Avg. 100 Current 80 Bps 60 40 20 0 3 vs. 1 5 vs. 3 7 vs. 5 10 vs. 7 30 vs. 10 The benefits from extending or shortening asset durations will depend on actual asset, liability and capital structure. Source: Barclays, Bloombe
Slide 26: Emphasize U.S. domestic sectors
Emphasize U.S. domestic sectors Transition from macro (correlated) to micro market Call on rate led sectors – housing, banks, insurance Municipals Self liquidating leverage to add return “Rent for Liquidity” Efficient Frontier Alternatives CNO Financial Group | 2013 Life Insurance Conference | April
Slide 27: U.S. Growth / European Growth sector views
U.S. Growth European p Growth Equities Commodities Banks Utilities (Regulated) Real Estate/REITS High Yield Carry Trade Retail p Credit Compression Healthcare Taxable Municipals Technology Floaters CRE Suburban Office CRE Multifamily U.S. Duration/Rate Bet Insur
Slide 28: Product Management Investments Asset-Liability Management
Product Management Investments Asset-Liability Management CNO Financial Group | 2013 Life Insurance Conference | April 16, 2013 28
Slide 29: Thank You
Thank You CNO Financial Group | 2013 Life Insurance Conference | April 16, 2013 29