Cno Financial Group, Inc. · NYSE:CNO

Cno Financial — Q1 2012 Earnings Presentation

66 slides from Cno Financial's earnings presentation, May 1, 2012

1. Slide 1: 1Q12 Financial and operating results

   1Q12 Financial and operating results for the period ended March 31, 2012 May 1, 2012 Unless otherwise specified, comparisons in this presentation are between 1Q12 and 1Q11.

2. Slide 2: Forward-Looking Statements

   Forward-Looking Statements Cautionary Statement Regarding Forward-Looking Statements. Our statements, trend analyses and other information contained in these materials relative to markets for CNO Financial’s products and trends in CNO Financial’s operations or financial results, as well as other sta

3. Slide 3: Non-GAAP Measures

   Non-GAAP Measures This presentation contains the following financial measures that differ from the comparable measures under Generally Accepted Accounting Principles (GAAP): operating earnings measures; book value, excluding accumulated other comprehensive income (loss) per share; operating return m

4. Slide 4: Adoption of New Accounting Standard

   Adoption of New Accounting Standard Effective January 1, 2012, we adopted ASU 2010-26 which modified the definition of the types of acquisition costs that can be deferred by insurance companies. We elected to adopt the new guidance on a retrospective basis. Accordingly, all prior periods presented h

5. Slide 5: CNO Financial Group

   ao CNO FINANCIAL GROUP CNO Financial Group

6. Slide 6: Summary

   Summary CNO  Our businesses continue to perform well – Solid earnings continued – Sales growth of 12% over 1Q2011  Financial strength and credit profile continue to improve – Generating significant amounts of excess capital – Continued share buybacks and related debt prepayments – Prepaid Senior H

7. Slide 7: Operating EPS

   Operating EPS Excluding Significant Items* (Diluted) CNO Earnings Excluding Significant Items* Earnings Drivers: 1Q2012 $0.15  Business growth and retention 1Q2011  In-force margin improvement $0.11  Favorable claim experience  Proactive capital deployment Weighted average diluted shares (in mil

8. Slide 8: Operating ROE

   Operating ROE CNO ($ millions)  Trailing 4 quarters earnings up 9% Operating ROE*, Trailing 4 Quarters over 1Q2011  Average common shareholders’ equity 2Q11 up 11% over 1Q2011 1Q11 6.3% 3Q11 4Q11 1Q12 6.0% 6.0% 6.1%  Levers to improve ROE 5.8% – Improving OCB through NGE changes – Layering on new

9. Slide 9: Growth in the CNO Franchise

   Growth ($ millions) in the CNO Franchise CNO Average liabilities on core business segments are increasing, while OCB is shrinking $16,106.8 $16,485.7 $15,481.7 $710.7 $704.0 $698.0 $2,630.0 $2,637.6 $2,676.8 $12,765.2 $13,145.0 $12,106.9 $5,511.5 $5,286.1 $5,101.2 2010 2011 1Q2012 CNO Financial Grou

10. Slide 10: Financial Strength

    Financial ($ millions) Strength CNO Liquidity Debt to Total Capital Consolidated RBC Ratio* Ratio** 1Q2012 1Q2011 1Q2012 1Q2011 360% 1Q2011 20.8% $171.9 341% $169.0 1Q2012 17.1% Strong capital generation further strengthening key financial strength measures * Risk-Based Capital (“RBC”) requirements

11. Slide 11: 1Q2012 Recap

    1Q2012 Recap CNO Investing in our growth Continuing to generate significant excess capital Profitability, financial strength and credit profile further improving CNO Financial Group 11

12. Slide 12: 1Q2012 Core Business Review

    1Q2012 Core Business Review Continued to improve performance across all core segments  Gains in recruiting and retention lead to increased agent force  Continued stability in LTC line  Manager Trainee Program fully operational; continue to hire and recruit 2012 class of trainees  PMA sales benef

13. Slide 13: 1Q2012 Sales and Distribution Results Bankers Life

    1Q2012 Sales and Distribution Results Bankers Life ($ millions) Quarterly NAP*  Sales results – Up 6.4% 4Q11 • Med supp sales up 6.7% $69.8 2Q11 3Q11 1Q12 • Life sales up 22.3% 1Q11 $60.1 $60.8 $58.8 $55.2 – Introduced 2 new products • STC sales up 27% • Annuity sales down 17% – Reflects low intere

14. Slide 14: Bankers Life Long Term Care

    Long Term Care Bankers Life Proactive management of risk and profitability resulting in continued stability in our LTC business…  Bankers utilizes exclusive distribution with a focus on middle income 65+ target market; lower risk profile – no group business  Since 2006, have implemented 4 rounds o

15. Slide 15: 1Q2012 Sales and Distribution Results Washington National

    1Q2012 Sales and Distribution Results Washington National ($ millions) Quarterly Core NAP*  Core product sales (supplemental 3Q11 4Q11 1Q12 2Q11 $20.7 health and life) up 20% $18.7 $19.5 $19.6 1Q11 – Voluntary worksite sales up 24% $16.5  Investment in life sales continues to gain traction  PMA n

16. Slide 16: 1Q2012 Sales and Distribution Results Colonial Penn

    1Q2012 Sales and Colonial Penn Distribution Results Quarterly NAP 1Q12  Sales growth continues, NAP up $17.5 28% 1Q11 2Q11 3Q11 4Q11 $13.6 $12.8 $12.7 $12.3  1Q results reflect continued robust lead generation activity  Increased investments in marketing and advertising driving sales growth CNO F

17. Slide 17: 2012 Outlook

    2012 Outlook Strong start with Sales Up In All 3 Core Segments and Positioned Well To Serve Our Target Market  Continued investment in branch expansion and management development  Introduction of new critical illness product  Expect strong sales of life insurance to continue  Expect continued he

18. Slide 18: 1Q2012 Consolidated Summary

    1Q2012 Consolidated Summary CNO  Operating Income* and Book Value: - Operating income of $40.6mm (15 cents per diluted share) and reflects the adoption of new DAC accounting - Significant items include favorable Medicare supplement and LTC reserve developments and corporate investment gains, offset

19. Slide 19: Segment EBIT Excluding Significant Items

    Segment EBIT Excluding Significant Items* CNO ($ millions) $80.3 CNO’s Earnings Engine $69.7 $12.7 $7.4  Growth in in-force EBIT driven by favorable $24.7 persistency and insurance policy income $24.3  In-force margin improvement through crediting rate actions, LTC rate increases, $59.5 and active

20. Slide 20: ASU 2010-26 Impact by Segment

    ASU 2010-26 Impact by Segment Quarter Ended March 31, 2012 CNO ($ in millions) Three months ended March 31, 2012 Restated for ASU 2010-26 Before DAC New Change Total In-force Business Bankers Life $ 74.3 $ 70.5 $ 97.1 $ (26.6) Washington National 25.5 24.7 27.4 (2.7) Colonial Penn 4.4 (9.8) 6.7 (16.

21. Slide 21: Impact of ASU 2010-26 on Colonial Penn

    Impact of ASU 2010-26 on Colonial Penn Colonial Penn ($ in millions) 1Q11 2Q11 3Q11 4Q11 1Q12 NAP $13.6 $12.8 $12.7 $12.3 $17.5 EBIT from in-force business $8.0 $10.1 $11.6 $9.8 $6.7 EBIT from new business (13.7) (9.6) (12.9) (8.0) (16.5) EBIT ($5.7) $0.5 ($1.3) $1.8 ($9.8) Other operating expense f

22. Slide 22: Statutory Earnings Power and Cash Generation

    Statutory Earnings Power and CNO Cash Generation ($ millions) 1Q12 Observations:  Statutory operating earnings of $87mm  Dividends totaling $45mm with $42mm retained in support of business growth  Results reflect normal seasonality and timing of cash flows to the holding company 1Q2011 2Q2011 3Q2

23. Slide 23: Stable Excess Capital Position

    Stable ($ millions) Excess Capital Position CNO Approximately $122 million total excess capital as of 3/31/12 Consolidated RBC Ratio Liquidity 1Q12 Observations: 1Q11 1Q12  RBC of 360%; $1.8 billion TAC 341% 360% and $498mm of required capital 1Q11 1Q12 $169.0 $171.9  Free cash flow** of $45mm; 35

24. Slide 24: Net Investment Income

    Net Investment Income ($ millions) CNO General Account Investment Income 4Q11 1Q12 2Q11  Relatively stable new money rate and 1Q11 $342.2 3Q11 $338.2 $344.2 $345.2 $336.1 earned yield progression despite low interest rate environment  Year over year increase in investment income primarily due to g

25. Slide 25: Realized Gains/Losses Recognized through Net Income

    Realized Gains/Losses Recognized through Net Income CNO ($ millions) 1Q11 2Q11 3Q11 4Q11 1Q12 Gross Gains $43.5 $29.7 $74.5 $41.9 $33.3 Gross Losses (25.1) (16.7) (41.0) (10.4) (2.5) Losses due to recognition of other-than-temporary impairments recognized in earnings (13.3) (10.1) (2.9) (8.3) (7.9)

26. Slide 26: Impairments

    Impairments ($ millions) CNO Low impairments reflect stable portfolio quality $14 $13.3 $12 $10.1 $10 $8.3 $7.9 $8 $6 $4 $2.9 $2 $0 1Q11 2Q11 3Q11 4Q11 1Q12 IGA Corporates Commercial Mortgage Loans Other CNO Financial Group 26

27. Slide 27: Unrealized Gain/Loss

    Unrealized Gain/Loss* CNO ($ millions) Unrealized Gain % of Invested Assets $2,000 Unrealized Gain 8% % of Invested Assets $1,800 7% $1,600 6% $1,400 5% $1,200 $1,000 4% $800 3% $600 2% $400 1% $200 $0 0% 1Q 2011 2Q 2011 3Q 2011 4Q 2011 1Q 2012 CNO Financial Group *Includes debt and equity securitie

28. Slide 28: Asset Allocation and Quality at 3/31/12

    Asset Allocation and Quality at 3/31/12* CNO ($ millions) Book Value by Allocation Investment Quality: Fixed Maturities Govts/Agency 1.3% Cash & <BBB AAA ABS Other 5.7% 10% 11% 5.0% AA Municipals 7.3% 10% CMBS 5.8% IG Corporates 54.6% HY Corporates BBB A 4.9% 47% 22% Mortgage Loans 6.3% CMOs 9.1% Re

29. Slide 29: Holding Company Investments at 3/31/12

    Holding ($ millions) Company Investments at 3/31/12 CNO Current Investments Long Term Model Allocation Cash & Cash and Money Market $39.3 Money Market Fixed Income (net) 84.5 $25 Fixed Income Equities 20.1 (net) Alternatives 28.0 $75 TOTAL $171.9 Alternatives & Equities (Balance) CNO Financial Group

30. Slide 30: 1Q2012 Investment Summary and Outlook

    1Q2012 Investment Summary and Outlook CNO Market Observations What we are doing…  During 1Q, corporate spreads tightened on rate back-  Remain engaged with credit, but cautious on up, continued strong demand for spread product, high beta names apparent reduction of tail risk driven by stabilizatio

31. Slide 31: CNO: Well Positioned in Growing & Underserved Markets

    CNO: Well Positioned in Growing & Underserved Markets  The middle-income, pre-retiree, and retirement markets are growing as the Baby Boomers age  These markets need simple, straightforward products that help address payment of healthcare expenditures, adequacy of retirement, and leaving a legacy

32. Slide 32: Questions and Answers

    Questions and Answers CNO Financial Group 32

33. Slide 33: Appendix

    Appendix CNO Financial Group 33

34. Slide 34: CNO Value Proposition

    CNO Value Proposition  Above average growth potential; expected sales growth of 8-12% annually – Percentage of the population 65 years old and older projected to increase by 50% in Growth twenty years Well – On average, over 10,000 Americans will turn 65 each day through 2030 Positioned in  Broad

35. Slide 35: 1Q2012 Significant Items

    1Q2012 ($ millions) Significant Items CNO The table below summarizes the financial impact of several significant items on our 1Q12 net operating income. Such items are summarized on the following slide. Management believes that identifying the impact of these items enhances the understanding of our

36. Slide 36: 1Q2012 Significant Items

    1Q2012 Significant Items CNO ($ millions) The following summarizes items that management believes are significant in understanding our 1Q2012 results: (1) Pre-tax earnings in the Bankers Life segment included the following items: Favorable reserve developments in the Medicare supplement and long-ter

37. Slide 37: 1Q2011 Significant Items

    1Q2011 Significant Items CNO ($ millions) The table below summarizes the financial impact of several significant items on our 1Q11 net operating income. Such items are summarized on the following slide. Management believes that identifying the impact of these items enhances the understanding of our

38. Slide 38: 1Q2011 Significant Items

    1Q2011 Significant Items CNO ($ millions) The following summarizes items that management believes are significant in understanding our 1Q2011 results: (1) Pre-tax earnings in the Bankers Life segment included the following items: Favorable reserve developments in the Medicare supplement and long-ter

39. Slide 39: Quarterly Earnings

    Quarterly Earnings CNO ($ millions) 1Q11 2Q11 3Q11 4Q11 1Q12 Bankers Life $ 62.2 $ 72.1 $ 79.4 $ 77.2 $ 70.5 Washington National 24.3 21.8 21.2 28.8 24.7 Colonial Penn (5.7) 0.5 (1.3) 1.8 (9.8) Other CNO Business 7.4 5.1 2.8 - (2.3) Corporate operations, excluding interest expense (0.5) (11.3) (27.5

40. Slide 40: Bankers Life Quarterly Earnings

    Quarterly Earnings Bankers Life ($ millions) 1Q11 2Q11 3Q11 4Q11 1Q12 Insurance policy income $400.0 $409.6 $404.6 $398.2 $406.5 Net investment income: General account assets 191.3 196.5 194.3 198.2 200.3 Other portfolios 18.3 0.4 (36.3) 3.6 34.6 Fee revenue and other income 2.3 3.3 3.6 4.6 2.9 Tota

41. Slide 41: Washington National Quarterly Earnings

    Quarterly ($ millions) Earnings Washington National 1Q11 2Q11 3Q11 4Q11 1Q12 Insurance policy income $145.4 $146.6 $145.9 $147.2 $147.4 Net investment income: General account assets 46.3 46.7 47.3 49.1 50.0 Other portfolios - - - 0.1 - Fee revenue and other income 0.3 0.2 0.4 0.1 0.2 Total revenues

42. Slide 42: Colonial Penn Quarterly Earnings

    Quarterly ($ millions) Earnings Colonial Penn 1Q11 2Q11 3Q11 4Q11 1Q12 Insurance policy income $50.3 $50.9 $50.8 $51.0 $53.4 Net investment income 10.3 10.5 10.1 10.2 10.0 Fee revenue and other income 0.2 0.2 0.2 0.3 0.2 Total revenues 60.8 61.6 61.1 61.5 63.6 Insurance policy benefits 38.5 37.8 35.

43. Slide 43: Other CNO Business Quarterly Earnings

    Quarterly ($ millions) Earnings Other CNO Business 1Q11 2Q11 3Q11 4Q11 1Q12 Insurance policy income $71.5 $72.5 $72.2 $73.8 $79.0 Net investment income: General account assets 88.2 87.6 85.4 85.7 84.0 Other portfolios 6.5 (0.9) (10.8) 2.4 8.7 Total revenues 166.2 159.2 146.8 161.9 171.7 Insurance po

44. Slide 44: Premiums Collected

    Premiums Collected CNO ($ millions) Collected Premiums -Trailing 4 Quarters  Trailing 4 quarters down 1.3% – Stable results at Bankers Life, 1Q11 2Q11 3Q11 4Q11 1Q12 Washington National, and $3,586.7 $3,578.6 $3,580.2 $3,577.6 $3,541.8 Colonial Penn – OCB declining primarily due to continued run-of

45. Slide 45: Premiums Collected – Med Supp

    Premiums ($ millions) Collected – Med Supp Bankers Life Med Supp – First-Year Premiums  First-year premiums down 5%; 1Q11 2Q11 3Q11 4Q11 $27.0 1Q12 $25.1 $24.7 $24.5 reflects consumer preferences $23.8 for lower priced products  Policies issued up 9% Med Supp First-Year Prems.-Tr. 4 Qtrs: $114.3 $

46. Slide 46: Premiums Collected – LTC

    Premiums Collected – LTC Bankers Life ($ millions) Long-Term Care – First-Year Premiums*  Net first-year premiums 1Q11 2Q11 3Q11 down 10%, due to product (Direct) $7.6 (Direct) (Direct) 4Q11 (Direct) 1Q12 (Direct) $7.4 $7.3 $7.1 mix shift to STC $6.9 (Net) (Net) (Net) (Net) $6.1 (Net) $6.0 $5.9 $5.

47. Slide 47: Premiums Collected – Life

    Premiums Collected – Life Bankers Life ($ millions) Life – First-Year Premiums 1Q12 3Q11 4Q11 $32.8 2Q11 $30.9 $30.8  First-year premiums up 33% $29.4 1Q11 due to higher SPWL sales $24.7 $15.4 $16.8 $14.3 $15.5 SPWL $11.0 Non- $13.7 $15.1 $15.4 $15.4 $16.0 SPWL First-Year Prems – Tr. 4 Qtrs: $102.2

48. Slide 48: Premiums Collected – Annuity

    Premiums ($ millions) Collected – Annuity Bankers Life Annuity – First-Year Premiums  First-year premiums down 17% reflecting management 2Q11 3Q11 $263.1 4Q11 1Q11 $258.0 actions to achieve target $221.3 $238.9 1Q12 returns in low interest rate $182.7 environment First-Year Prems – Tr. 4 Qtrs: $999

49. Slide 49: Premiums Collected – Supplemental Health

    Premiums Collected – Supplemental Health Washington National ($ millions) Supplemental Health – First-Year Premiums  First-year premiums up 7% due 4Q11 1Q12 2Q11 to continued higher sales 1Q11 $13.2 $13.7 3Q11 $13.2 $14.0 $14.1 First-Year Prems – Tr. 4 Qtrs: $52.7 $53.3 $53.5 $54.1 $55.0 Total Prem

50. Slide 50: Premiums Collected – Life Colonial Penn

    Premiums ($ millions) Collected – Life Colonial Penn Life – First-Year Premiums  First-year premiums up 20% due 1Q12 to continued robust lead 3Q11 4Q11 $10.4 1Q11 2Q11 generation activity and sales $8.7 $8.6 $8.9 $9.2 First-Year Prems – Tr. 4 Qtrs: $33.1 $33.6 $34.4 $35.4 $37.1 Total Premiums - Qua

51. Slide 51: 1Q12 Holding Company Liquidity

    1Q12 Holding Company Liquidity CNO ($ millions) 1Q 2012 Cash and Investments Balance - Beginning $202.8 * Sources Dividends from Insurance Subsidiaries 45.0 Dividends from Non-Life Affiliates - Surplus Debenture Interest 12.1 Service and Investment Fees, Net 7.3 Interest/Earnings on Corporate Invest

52. Slide 52: GAAP Balances for Deferred Tax Asset: Loss Carryforwards

    GAAP Balances for Deferred Tax Asset as of 3/31/12: Loss Carryforwards – Gross1 vs. Net2 CNO ($ millions) Totals $1,000.0 $1,756.3 Gross Gross Loss Carryforwards3 $863.6 Valuation Allowance3 (938.4) $800.0 Net $305.4 Net Loss Carryforwards $817.9 Gross $600.0 $545.1 Gross GAAP valuation allowances d

53. Slide 53: Commercial Mortgage Loans at 3/31/12

    Commercial Mortgage Loans at 3/31/12 CNO By Vintage By Property Type Other Multi-Family 2.1% 2011 2009 3.1% 2010 0.5% 5.7% 5.2% 2004 and Industrial 2004 andPrior 17.6% Prior 25.2% 2008 2008 26.2% 18.8% 19.1% Retail 2005 40.1% 2005 7.8% 9.3% Office 20072007 37.1% 2006 20.2% 20.2% 2006 16.3% 17.8%  6

54. Slide 54: Commercial Mortgage Loans Portfolio

    Commercial Mortgage Loans CNO Portfolio at 03/31/12 ($ millions) $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $- 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026+ CNO Financial Group Run-off of Principal of Current CML Portfolio Principal Maturities by Year 54

55. Slide 55: European Debt by Select Countries

    European Debt by Select Countries CNO ($ millions) Market / Total Sovereigns Corporates Banks Total Market BV Issuers Italy $ - $ 26.1 $ - $ 26.1 $ 23.9 91% 1 Spain - 64.6 34.3 98.9 91.8 93% 3 Total $ - $ 90.7 $ 34.3 $ 125.0 $ 115.7 93% 4 CNO Financial Group 55

56. Slide 56: CMBS at 3/31/12

    CMBS at 3/31/12 CNO ($ millions) Market Value Book Value Avg. 60+ Avg. Accum. % of Rating (mil.) (mil.) % of CMBS* Avg. Support Delinq. Loss Portfolio* AAA $1,153.9 $1,061.0 75.9% 29.7% 4.9% 1.4% 4.40% AA 243.6 233.8 16.0% 22.4% 7.5% 1.5% 0.91% A 115.3 115.7 7.6% 19.7% 6.4% 2.4% 0.44% BBB 7.2 7.6 0.

57. Slide 57: Information Related to Certain Non-GAAP Financial Measures

    Information Related to Certain Non-GAAP Financial Measures The following provides additional information regarding certain non-GAAP measures used in this presentation. A non-GAAP measure is a numerical measure of a company’s performance, financial position, or cash flows that excludes or includes am

58. Slide 58: Information Related to Certain Non-GAAP Financial Measures

    Information Related to Certain Non-GAAP Financial Measures A reconciliation of net income applicable to common stock to net operating income (and related per-share amounts) is as follows (dollars in millions, except per-share amounts): 1Q11 2Q11 3Q11 4Q11 1Q12 Net income applicable to common stock $

59. Slide 59: Information Related to Certain Non-GAAP Financial Measures

    Information Related to Certain Non-GAAP Financial Measures A reconciliation of operating income and shares used to calculate basic and diluted operations earnings per share is as follows (dollars in millions, except per-share amounts, and shares in thousands): 1Q11 2Q11 3Q11 4Q11 1Q12 Operating inco

60. Slide 60: Information Related to Certain Non-GAAP Financial Measures

    Information Related to Certain Non-GAAP Financial Measures Book value, excluding accumulated other comprehensive income (loss), per share This non-GAAP financial measure differs from book value per share because accumulated other comprehensive income (loss) has been excluded from the book value used

61. Slide 61: Information Related to Certain Non-GAAP Financial Measures

    Information Related to Certain Non-GAAP Financial Measures Operating return measures Management believes that an analysis of return before loss on extinguishment of debt, net realized gains or losses, fair value changes due to fluctuations in the interest rates used to discount embedded derivative l

62. Slide 62: Information Related to Certain Non-GAAP Financial Measures

    Information Related to Certain Non-GAAP Financial Measures The calculations of: (i) operating return on allocated capital, excluding accumulated other comprehensive income (loss) and net operating loss carryforwards (a non-GAAP financial measure); and (ii) return on equity, for the twelve months end

63. Slide 63: Information Related to Certain Non-GAAP Financial Measures

    Information Related to Certain Non-GAAP Financial Measures A reconciliation of pretax operating earnings (a non-GAAP financial measure) to segment operating return (loss) and consolidated net income (loss) for the twelve months March 31, 2012, is as follows (dollars in millions): Bankers Washington

64. Slide 64: Information Related to Certain Non-GAAP Financial Measures

    Information Related to Certain Non-GAAP Financial Measures A reconciliation of average allocated capital (for the purpose of determining return on allocated capital), excluding accumulated other comprehensive income (loss) and net operating loss carryforwards (a non-GAAP financial measure) to averag

65. Slide 65: Information Related to Certain Non-GAAP Financial Measures

    Information Related to Certain Non-GAAP Financial Measures A reconciliation of consolidated capital, excluding accumulated other comprehensive income (loss) and net operating loss carryforwards (a non- GAAP financial measure) to common shareholders’ equity, is as follows (dollars in millions): (Cont

66. Slide 66: Information Related to Certain Non-GAAP Financial Measures

    Information Related to Certain Non-GAAP Financial Measures Debt to capital ratio, excluding accumulated other comprehensive income (loss) This non-GAAP financial measure differs from the debt to capital ratio because accumulated other comprehensive (income) loss has been excluded from the value of c

CNO Financial Group — Q1 2012 Earnings Presentation on 6ix