Cno Financial Group, Inc. · NYSE:CNO
Cno Financial — Conseco — Q2 2008 Earnings Presentation
40 slides from Cno Financial's earnings presentation, Aug 12, 2008
Slide 1: Second Quarter 2008 Financial and Operating Results
Conseco, Inc. selected slides from our Second Quarter 2008 Financial and Operating Results Presentation (as filed in our Current Report on Form 8-K dated August 12, 2008)
Slide 2: Key Debt Covenants
Key Debt Covenants CNO ($ millions) Q4 2005 Q4 2006 Q4 2007 Q2 2008* • In compliance with all Debt/Capital Ratio financial covenants Covenant Maximum 25.0% 30.0% 30.0% 30.0% Actual 16.2% 17.4% 21.0% 22.8% Interest Coverage** Covenant Minimum 2.00X 2.00X 2.00X 2.00X Actual 2.06X 2.06X 3.34X 3.44X Sta
Slide 3: Financial Indicators
Financial Indicators* CNO • Book value per diluted share (excluding accumulated other comprehensive loss) – $21.76 at 6/30/08 vs $24.41 at 12/31/07 – Pro forma $18.22 at 6/30/08** • Debt to total capital ratio (excluding accumulated other comprehensive loss) – 23% at 6/30/08 vs 21% at 12/31/07 – Pro
Slide 4: Liquidity: Holding Company Sources and Uses of Funds
Liquidity: Holding Company Sources and Uses of Funds CNO ($ millions) • Corporate liquidity – Available holding company liquidity in excess of $104 million at 6/30/08, plus $80 million revolver • Sources of and uses of funds, excluding insurance subsidiary dividends 2007 YTD 2008 Sources: Interest o
Slide 5: Selected Slide from KBW 2008 Insurance Conference
Conseco, Inc. Selected Slide from KBW 2008 Insurance Conference (as filed in our Current Report on Form 8-K dated September 3, 2008)
Slide 6: Limited Exposure to Troubled Asset Classes
Limited Exposure to Troubled Asset Classes Composition of Investments as of 6/30/08 • Structured securities represent 24% of total Other actively managed fixed maturity securities 9.8% CMOs – Over 89% AAA rated 16.2% – Over 40% agency CMOs ABS 1.7% Investment – 11% Alt-A Assets (99% AAA rated) Grade
Slide 7: Conseco, Inc. Investment Portfolio As of June 30, 2008
Conseco, Inc. Investment Portfolio As of June 30, 2008 1
Slide 8: Summary
Summary Our goal is stable and predictable investment performance Diversified and liquid investment portfolio Portfolio migration and MTM trends consistent with credit cycle and overall credit market Risk controls include credit policy, asset liability management, hedging, and compliance E
Slide 9: Asset Allocation
Asset Allocation As of 6/30/2008 (Allocations based on book values) Our diversified investment portfolio allocation emphasizes traditional insurance sectors Investment Grade CMOs Corporates 16.2% 59.1% CMBS 3.9% ABS 1.7% Commercial Mortgages 9.4% Municipals 2.1% High Yield Govts and Agencies Corpora
Slide 10: Asset Allocation
Asset Allocation As of 6/30/2008 $Millions Qualitative and MTM trends are consistent with expectations and credit cycle $13,972 $13,266 $3,827 $3,639 $2,227 $2,222 $924 $869 $504 $480 $404 $842 $352 $795 $113 IG $486 CMOs $432 Corporates Comm. CMBS $336 $365 Book Value Mort. HY Municipals $45 Market
Slide 11: Asset Allocation
Asset Allocation As of 6/30/2008 Relative portfolio allocations vs. peer averages CMOs IG 4.8% Corporates 4.5% Percentage Points High Non-Traditional Municipals 0.9% 0.7% Peer Avg. Comm. Mort. HY (0.5%) Corporates (0.2%) Govts/Agen. (2.1%) CMBS (2.4%) Percentage Points Low ABS (5.6%) 5 Peer averages
Slide 12: Investment Grade Corporates
Investment Grade Corporates As of 6/30/2008 Our IG Corporate allocation is diversified and emphasizes traditionally less cyclical sectors Other Retail 1.3% 7.1% Utilities Consumer Products 1.5% 13.4% IG Corporates Technology 2.2% 59.1% Building Mat'ls 2.5% Aerospace/ Defense 3.1% Energy/Pipelines 11
Slide 13: High Yield Corporates
High Yield Corporates As of 6/30/2008 Our HY Corporate allocation is diversified and is weighted away from cyclicals Real Estate/REITs, 6.8% Entertainment/Gaming, 6.3% Healthcare/Pharma, 7.1% High Yield Technology, 5.4% Corporates 3.7% Food/Beverage, 8.2% Energy/Pipelines, 5.3% Telecom, 4.5% Buildin
Slide 14: CMBS
CMBS As of 6/30/2008 $Millions Our CMBS exposure emphasizes AAA and AA categories (more than 70%) $581 CMBS 3.9% $563 $144 $69 $106 $23 $62 $90 $107 Book Value AAA $20 AA Market Value A BBB 8 BB
Slide 15: CMBS
CMBS As of 6/30/2008 Our CMBS exposure is heavily weighted toward older vintages with stronger qualitative characteristics and seasoning 2007 5.5% 2006 10.7% Pre-2004 35.3% 2005 25.1% 2004 9 23.4%
Slide 16: CMBS
CMBS As of 4/30/2008 Our CMBS are backed by a diverse pool of underlying collateral – $90 billion, from more than 7,700 commercial mortgage loans Office 27.6% Multi-Family 15.1% Hotel 5.9% Industrial Retail 4.2% 32.3% 10 Other 14.9%
Slide 17: CMBS
CMBS As of 6/30/2008 Underlying collateral is geographically diverse New Pacific England 18.1% 4.0% Middle West North Atlantic Mountain Central 19.4% 7.0% 2.6% East North Central 8.4% South Atlantic 19.2% West South East South Central Central 7.6% 2.0% Multiple Regions 11.7% 11
Slide 18: CMBS
CMBS We track our CMBS using a robust underwriting and surveillance process Collateral Sponsor Structure Surveillance DSCR Property/company and Trust structure Monitor rating versus management overview performance LTV Cash flow allocation Origination practices Identify underperformin
Slide 19: CMOs
CMOs As of 6/30/2008 $Millions Our CMO portfolio is approximately 50% GSE guaranteed and is more than 99% AAA rated $1,742 CMOs $1,376 16.2% $1,581 $1,356 $625 $618 $84 Book Value $83 Private Label Market Value FHLMC FNMA 13 GNMA
Slide 20: CMOs
CMOs As of 6/30/2008 $Millions Our private label CMOs are diversified by type and vintage and are more than 98% AAA rated 2007 - Prime Jumbo Private Label MV/BV: 89% 2004 - Alt-A CMOs 2006 - Prime Jumbo MV/BV: 93% 7.4% MV/BV: 94% 10.6% 3.7% 2005 - Alt-A 9.8% MV/BV: 85% 0.6% 2005 - Prime Jumbo 2006 -
Slide 21: CMOs
CMOs As of 6/30/2008 Our CMO portfolio has moderate cash flow volatility Z-Tranche Sequential 2.3% 46.5% Eff. Duration: 16.7 Eff. Duration: 7.18 Convexity: (1.77) Convexity: (0.83) PAC 19.8% Eff. Duration: 8.81 Convexity: 0.10 TAC/Accretion Directed 5.7% Eff. Duration: 7.36 Convexity: (0.20) Pass Th
Slide 22: Asset Backed Securities
Asset Backed Securities As of 6/30/2008 ABS 1.7% Credit Cards Subprime HELs 21.7% 25.2% Equipment 3.2% Financial Settlements 14.6% Home Equity 35.2% 16
Slide 23: Asset Backed Securities
Asset Backed Securities As of 6/30/2008 $Millions Subprime HEL and HELOC valuations reflect challenging MTM environment for mortgage securities $141 $103 $89 $103 $85 $59 $85 $53 $13 Book Value Home Equity Subprime HELs $11 Avg. Rating: Aa2 Market Value Credit Cards Avg. Rating: Aa2 Avg. Rating: A1
Slide 24: ABS/CMO
ABS/CMO We have a robust analytical process for residential mortgage securities Collateral Sponsor Structure Surveillance Debt-to-Income Origination practices Trust structure Collateral performance review: variance attribution Loan-to-Value Underwriting practices Cash flow allocation
Slide 25: Commercial Mortgages
Commercial Mortgages As of 6/30/2008 Our commercial mortgage loan allocation includes credit tenant loans Commercial Mortgages 9.4% Office 37.5% Retail 48.5 Industrial/Warehouse 8.4% Multi-Family Other 4.7% 19 1.1%
Slide 26: Commercial Mortgages
Commercial Mortgages As of 6/30/2008 New Pacific England 6.8% 9.1% Middle West North Atlantic Mountain Central 8.1% 10.2% 13.5% East North Central 19.3% South Atlantic 21.7% West South East South Central Central 5.9% 5.4% 20
Slide 27: Commercial Mortgages
Commercial Mortgages As of 6/30/2008 $Millions Our portfolio tends toward a large number of loans with few large exposures 54.9% Loan Balance 21.3% 10.3% 10.4% 3.1% $0 - $10 $11 - $20 $21 - $30 $31 - $40 $40+ 90.1% Number of Loans 6.6% 1.9% 0.4% 1.0% 21 $0 - $10 $11 - $20 $21 - $30 $31 - $40 $40+
Slide 28: Asset Liability Management
Asset Liability Management Our asset portfolio has lengthened to better match our insurance liabilities 10 1.0 8.2 7.9 8 7.5 7.3 7.5 0.8 7.1 7.1 7.0 7.2 Absolute Variance (years) 6.9 6.9 6.4 6.4 6.2 Duration (years) 6 0.6 4 0.4 2 0.2 0 0.0 2002 2003 2004 2005 2006 2007 2Q 2008 Actual Target Variance
Slide 29: Asset Liability Management
Asset Liability Management $Millions We use projections of Asset and Liability cash flows to 5,000 articulate opportunities and risks 4,000 3,000 Simulation analysis, 2,000 including cash flow testing 1,000 Portfolio gap analysis, including maturity analysis 0 and interest rate sensitivity analy
Slide 30: Asset Liability Management
Asset Liability Management Asset segmentation focuses on product segment needs Metrics Uses / Results Duration Product management Convexity Life Planning Statutory Yield – Income Annuity Portfolios Projected cash flow – Capital Investment income Spec. Disease Surplus management Sur
Slide 31: Asset Liability Management
Asset Liability Management Our EIA hedging process demonstrates effective results % Inforce R Squared 1.00% 100.50% 0.50% 100.25% 0.00% 100.00% 1Q '06 2Q '06 3Q '06 4Q '06 1Q '07 2Q '07 3Q '07 4Q '07 1Q '08 2Q '08 -0.50% 99.75% Gain/Loss as % Inforce R Squared -1.00% 99.50% 25
Slide 32: Risk Management
Risk Management Systemic risks we closely monitor Widening of general credit spreads Volatility of interest rates Directional movements in prices and volatilities of equity indices Changes in the level of the yield curve Changes in asset valuations 26
Slide 33: Risk Management
Risk Management Equity Volatility (VIX) Vix 35 30 25 20 15 10 5 0 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 27 Source: Bloomberg
Slide 34: Risk Management
0 50 100 150 200 250 300 350 Ja Spread n- 0 Fe 6 b- 0 M 6 ar -0 A 6 pr -0 M 6 ay -0 Ju 6 n- 06 Source: Lehman and Moody’s Ju l-0 A 6 ug -0 S 6 ep -0 O 6 Risk Management ct -0 N 6 ov -0 D 6 ec -0 Ja 6 n- 0 Fe 7 b- A Corporate - Spread 0 M 7 ar -0 A 7 pr -0 M 7 ay -0 Ju 7 n- 07 Ju l-0 Default Rates A
Slide 35: Risk Management
Ja n- -20 0 20 40 60 80 100 120 06 Spread Fe b- 06 M ar -0 A 6 pr -0 M 6 ay Source: Lehman -0 6 Ju n- 06 Ju l-0 A 6 ug -0 6 Se p- 06 O Risk Management ct -0 N 6 ov -0 6 D ec -0 6 Ja n- 0 Fe 7 b- 07 M ar -0 A 7 pr -0 M 7 ay -0 7 Ju n- 07 Ju l-0 A 7 ug -0 7 Se p- 07 O ct 10 Year vs. 30 Year Treasuries
Slide 36: Risk Management
Risk Management Home Prices (Year-Over-Year Change) 11.5% 7.5% 3.2% 0.2% -1.7% -3.4% -4.6% -8.9% -15.8% March 06 June 06 Sept 06 Dec 06 March 07 June 07 Sept 07 Dec 07 May 08 30 Source: S&P/Case-Shiller
Slide 37: Risk Management
Risk Management Proactive approach to controlling key risks Documented guidelines for risk policies and risk capacity Monitoring and enforcing adherence to our risk policies Measuring quantifiable risks using proven methodologies and market-consistent values Fundamental credit surveillance
Slide 38: Risk Management
Risk Management As of 6/30/2008 Managing through the credit cycle by emphasizing long-term assessments of value and quality • Overall mark-to-market and • Highly rated, highly liquid credit migration consistent with credit cycle • Satisfactory performance, with some pressure on • Pressure on financi
Slide 39: Performance
Performance Our investment yield has trended favorably in recent periods Yield* 6.0 5.8 5.6 5.4 5.2 5.0 4.8 08 03 03 04 04 04 04 05 05 05 05 06 06 06 06 07 07 07 07 08 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q * Gross yields before investment expenses 33
Slide 40: Conseco, Inc. Investment Portfolio As of June 30, 2008
Conseco, Inc. Investment Portfolio As of June 30, 2008 34