Slide 1: Conseco's Long-Term Care Business: A Primer
Conseco’s Long-Term Care Business: A Primer September 2007 Conseco, Inc.
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 Conseco’s products and trends in Conseco’s operations or financial results, as well as other statements, con
Slide 3: A refresher on the typical features of long-term care policies
A refresher on the typical features of long-term care policies Provide benefits for care provided in a long-term care facility or assisted living facility (but not a hospital), care received in one’s home (“home health care”), or both Premiums are generally determined based on the age of the insured
Slide 4: More details on benefits provided under long-term care policies
More details on benefits provided under long-term care policies Eligibility for benefits generally requires that the insured need assistance with at least two activities of daily living or have cognitive impairment that makes it unsafe for the insured to live unsupervised. Alternatively, eligibility
Slide 5: The life cycle of a block of long-term care policies
The life cycle of a block of long-term care policies Premiums are recognized as revenue when due Incurred claims are expected to be small in the early policy years and grow as policies age A substantial part of premiums collected are required to fund benefits payable in future periods and become par
Slide 6: Long-term care business life cycle: Incurred claim ratios
Long-term care business life cycle: Incurred claim ratios Incurred Claim Ratio (Incurred Claims / Premium) 300.0% 250.0% 200.0% 150.0% 100.0% 50.0% 0.0% 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 -50.0% -100.0% -150.0% Policy Year Incurred claims are very low in the early years of
Slide 7: Long-term care business life cycle: Change in active life reserve
Long-term care business life cycle: Change in active life reserve A substantial part of the premium collected in early years is held back as active life reserves to fund the claims that will be incurred in the future Eventually, active life reserves begin to be released (Year 18 in this example). Su
Slide 8: Long-term care business life cycle: Total benefits incurred
Long-term care business life cycle: Total benefits incurred When incurred claims and the change in active life reserves are combined, the increase over time is less severe However, the benefit ratio will increase over time, eventually exceeding 100% This increase is substantially offset by investmen
Slide 9: Long-term care business life cycle: Investment income
Long-term care business life cycle: Investment income Investment income is earned on the assets supporting the reserves Such income becomes an increasingly important component of revenue over time 9
Slide 10: Long-term care business life cycle: Interest-adjusted benefit ratio
Long-term care business life cycle: Interest-adjusted benefit ratio The interest-adjusted benefit ratio, which includes the change in active life reserves and investment income, is expected to be level over time 10
Slide 11: Long-term care policies are subject to changing experience
Long-term care policies are subject to changing experience Benefits are expected to increase over time as the insured ages, and actual profitability is sensitive to experience relating to several assumptions made in pricing. All LTC business, including ours, has experienced unfavorable development r
Slide 12: Segment performance: Other Business in Run-off
Segment performance Other Business in Run-off Pre-Tax Operating Income* ($ millions) Recent experience from this block reflects significant increases to reserves related to prior- period claim development For example, the experience in Q2 2007 reflects $118 million of increases to prior-period incur
Slide 13: A refresher on how long-term care reserves are determined
A refresher on how long-term care reserves are determined There are two components of policyholder liabilities: Active life reserves – Reserve for future policyholder benefits not yet incurred (calculated as the present value of future benefits, less future net premiums) Claim reserves – Liability f
Slide 14: Balance Sheet detail: Other Business in Run-off
Balance Sheet detail Other Business in Run-off ($ millions) Insurance Liabilities and Intangible Assets, Net of Reinsurance Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Reserve for Future Benefits $2,413.3 $2,413.6 $2,412.7 $2,412.3 $2,409.1 Claim Reserve 731.4 734.8 801.2 816.5 940.4 Insurance Acquisiti
Slide 15: Active life reserves
Active life reserves These reserves are calculated using assumptions estimated in the year a policy is issued (or, for business in force as of August 31, 2003 – the “fresh-start date” – the assumptions developed on that date) Assumptions include estimates for persistency, claim costs, morbidity, int
Slide 16: Claim reserves
Claim reserves These reserves are for benefits to be paid in the future for our current claims (both reported and incurred but not reported claims). These reserves are determined using assumptions based on our current best estimate The significant assumptions utilized in establishing claim reserves
Slide 17: Validation of claims incurred during a period
Validation of claims incurred during a period “Verified basis” normalizes all periods for the impact of claim reserve deficiencies Expected incurred losses are paid out over subsequent periods At each reporting date, the incurred claims estimate for a particular period is restated or “verified” as t
Slide 18: Verified incurred development: Other Business in Run-off
Verified incurred development* Other Business in Run-off Developed Deficiencies in Periods Reporting Periods Prior to Q2 07 Q1 07 2006 2005 2004 2004 Reported Claims 221.5 119.7 433.4 396.0 370.8 Prior Period Development (108.5) (34.9) (71.9) (58.7) (44.1) Verified Claims as of Reporting Date 113.0
Slide 19: Verified incurred development: Bankers Life LTC
Verified incurred development Bankers Life LTC Developed Deficiencies in Periods Reporting Periods Prior to Q2 07 Q1 07 2006 2005 2004 2004 Reported Claims 108.0 104.2 398.3 341.2 294.1 Prior Period Development - 3.3 (0.5) (4.3) (1.0) Verified Claims as of Reporting Date 108.0 107.5 397.8 336.9 293.
Slide 20: Q2 2007 earnings: Other Business in Run-off
Q2 2007 earnings Other Business in Run-off ($ millions) Q2 2007 As Verified Q2 2006 Reported Basis Insurance policy income $ 82.1 $ 78.1 $ 78.1 Net investment income 44.6 47.6 47.6 Fee revenue and other income 0.1 0.1 0.1 Total revenues 126.8 125.8 125.8 Insurance policy benefits 96.9 231.6 113.3 Am
Slide 21: Benefit detail: Other Business in Run-off
Benefit detail Other Business in Run-off ($ millions) Total Benefits Incurred claims in all periods reflect volatility due to development of out-of- period incurred claim estimates Includes reserve strengthening adjustments of $110 million in Q2 2007 Increase (decrease) in active life reserves varie
Slide 22: Interest-adjusted benefit ratio: Other Business in Run-off
Interest-adjusted benefit ratio* Other Business in Run-off Verified basis normalizes all periods for impact of claim reserve deficiencies Prior-period deficiencies increased benefit ratio by 152 percentage points in Q2 2007 Q2 2006 benefit reserve adjustment reduced benefit ratio by 11 percentage po
Slide 23: Claim counts and claims paid: Other Business in Run-off
Claim counts and claims paid Other Business in Run-off Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Claims Paid ($ mils.) $ 95.4 $ 107.4 $ 83.1 $ 90.4 $ 101.2 $ 96.1 $ 81.6 $ 102.0 $ 96.8 Claimant Counts 12,240 12,449 12,290 11,805 12,536 12,288 12,048 11,870 12,424 Claimant count estimates
Slide 24: LTC persistency: Other Business in Run-off
LTC persistency Other Business in Run-off Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Policy Counts 202,804 201,649 197,585 194,080 190,134 187,123 183,655 179,952 Annualized Termination Rates 10.7% 2.3% 7.8% 6.9% 7.9% 6.2% 7.2% 7.8% Our termination rates have exceeded expectations in recent per
Slide 25: Summary: Other Business in Run-off
Summary Other Business in Run-off Significant steps to reduce claims reserve volatility Continued progress in business turnaround $40 million – better claims management Premium re-rates $35 million (Round 1) $22 million (Round 2) We believe we will return the “Other Business in Run-off” block to pro
Slide 26: Questions and Answers
S CONSECO Questions and Answers
Slide 27: Appendix
S CONSECO Appendix
Slide 28: Information Related to Certain Non-GAAP Financial Measures
Information Related to Certain Non-GAAP Financial Measures The following provides additional information regarding certain non-GAAP measures used in this presentation. A non- GAAP measure is a numerical measure of a company’s performance, financial position, or cash flows that excludes or includes a
Slide 29: Q2 Earnings: CNO Consolidated
Q2 Earnings CNO Consolidated ($ millions) Q2 2006 Q2 2007 Bankers Life $63.7 $65.5 Conseco Insurance Group 64.7 43.8 Colonial Penn 6.5 6.7 Other Business in Run-Off 4.4 (133.2) Corporate operations, excluding interest expense (5.0) (8.0) EBIT, excluding costs related to the proposed litigation settl