CNO Financial Group, Inc. · NYSE:CNO
CNO Financial — Q3 2012 Earnings Presentation
50 slides from CNO Financial's earnings presentation, Oct 30, 2012
Slide 1: 3Q12 Financial and Operating Results
3Q12 Financial and operating results for the period ended September 30, 2012 October 30, 2012 Unless otherwise specified, comparisons in this presentation are between 3Q12 and 3Q11.
Slide 2: Forward-Looking Statements
Forward-Looking Statements Certain statements made in this presentation should be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These include statements about future results of operations and capital plans. We caution investors that these f
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, value excluding accumulated other comprehensive income (loss) per share; operating re
Slide 4: CNO Financial Group
CNO Financial Group 4
Slide 5: Summary: 3Q results reflect significant management actions
Summary CNO 3Q results reflect significant management actions – Successfullyy completed p recapitalization; p ; lowering g cost of capital while maintaining strong capital ratios – Significant progress on OCB litigation – Review of actuarial assumptions Businesses continue to perform well with cor
Slide 6: Core Operating Earnings Building
Core Operating Earnings Building CNO Operating Earnings Excluding Significant Items* 3Q12 Earnings and ROE Drivers $0 26 ** $0.26 Accomplishments in the quarter 3Q11 reflected in reported earnings $0.16 Excluding E l di significant i ifi t it items, core Operating earnings strong EPS $.12 $.11
Slide 7: Recapitalization Summary
Recapitalization Summary CNO Raised $950 million to pay off senior secured debt and repurchase majority of the convertible debentures New debt structure reflects strong performance and improved credit ratings Lower weighted average cost of capital Improved financial flexibility and debt maturity
Slide 8: Sustained Capital Strength
Sustained Capital Strength CNO Strong capital position post-recapitalization Uninterrupted free cash flow generation Capital deployment strategy and guidance remain intact Capital ratios remain strong after deploying $455mm, reducing the diluted share count by 15% YTD RBC Liquidity Debt to Capita
Slide 9: Investment in the Business
Investment in the Business CNO ($ millions)) Investing in productivity and growth of the agent force T t l YTD NAP Total YTD 3Q12 YTD 3Q11 Expanding presence by adding new $271.8 $287.7 Up 6% locations and geographies $256 1 * $256.1 Up 13% * $226.9 * Developing and launching new products t me
Slide 10: Bankers Life 3Q12 Sales and Distribution Results
3Q12 Sales and Distribution Results Bankers Life ($ millions) Quarterly NAP* Agent g force g grew 7% YTD driven by y 4Q11 increased agent retention 3Q11 $69.8 1Q12 2Q12 3Q12 Distribution and market focus allow for shift $60.8 $58.8 $59.5 $57.6 in product mix 2 ** $47.2 $47 $44.9 ** – Overall sal
Slide 11: Washington National 3Q12 Sales and Distribution Results
3Q12 Sales and Di Distribution t ib ti Results R lt Washington National ($ millions) Quarterly y Core NAP* Core* product sales up 9% 2Q12 4Q11 3Q12 – Primarily driven by voluntary worksite 3Q11 $20 7 $20.7 1Q12 $22.0 $ $21 2 $21.2 $19.5 $19.6 sales Investment in life sales continues to gain trac
Slide 12: Colonial Penn 3Q12 Sales and Distribution Results
3Q12 Sales and Colonial Penn Di Distribution t ib ti Results ($ millions) R lt Quarterly NAP Sales growth continues; NAP up 19% 1Q12 $17.5 2Q12 3Q12 Year over year sales growth per 3Q11 4Q11 $15.6 $15 1 $15.1 increased lead volumes and higher $12.7 $12.3 sales productivity Increased I d invest
Slide 13: Outlook
Outlook Efforts continue to strengthen distribution and product offerings to effectively serve our growing target market Continued investment in branch expansion and management development Introduction of new critical illness product Expect strong sales of life insurance to continue Expect c
Slide 14: Net Investment Income
Net Investment Income ($ millions) CNO General Account Investment Income New N money ratet reflects fl t consistent i t t risk profile, sequentially tighter credit curve and lower risk free rates during 2Q12 3Q12 1Q12 4Q11 $351.1 $349.4 much of 3Q Q 3Q11 $344 2 $344.2 $345.2 $338.2 Year over yea
Slide 15: Realized Gains, Losses and Impairments
Realized ($ millions) Gains, Losses and Impairments CNO $74.5 $43 9 $43.9 $2.9 $41.9 $41.6 $41.2 $33.3 $32.1 $41.0 $18.7 $23.1 * $8.3 $10.4 $9.7 $3.5 $10.4 $7.9 $9.0 $2.5 $2.5 $6.2 3Q11 4Q11 1Q12 2Q12 3Q12 Gross Realized Gains Gross Realized Losses Impairments * 3Q12 impairments primarily associated
Slide 16: Unrealized Gain/Loss
Unrealized Gain/Loss* CNO ($ millions) Unrealized Gain % of Invested Assets $3,000 Unrealized Gain 14% % of Invested Assets 12% $2,500 10% $2,000 8% $1,500 6% $1,000 4% $500 2% $0 0% 3Q 2011 4Q 2011 1Q 2012 2Q 2012 3Q 2012 CNO Financial Group *Includes debt and equity securities classified as availa
Slide 17: Asset Allocation and Quality at 9/30/12
Asset Allocation and Quality at 9/30/12* 9/30/12 CNO ($ millions) Book Value byy Allocation Investment Quality: Fixed Maturities Govts/Agency 0.8% Cash & ABS Other <BBB AAA 5 8% 5.8% 6.1% 10% 0% 10% AA Municipals 9% 7.3% CMBS 5.8% IG Corporates 54 4% 54.4% HY Corporates BBB A 4.6% 48% 23% Mortgage L
Slide 18: Holding Company Investments at 9/30/12
Holding ($ millions) g Company p y Investments at 9/30/12 CNO Investment Performance Investment Allocation Performance Summary 3Q12 YTD Cash & Money Market Cash & Money Market 0.02% 0.09% / Fixed Income $266.5 Fixed Income 3.44% 8.43% Equities / Equities 6.35% 16.43% Alternatives $47.1 Alternatives
Slide 19: 3Q12 Investment Summary and Outlook
3Q12 Investment Summary and Outlook CNO Market Observations What we are doing… Credit market yields compressed due to the Federal Balancing commitment to quality with earnings Reserve’s intent to pin short rates for an extended objectives period slow U period, U.S. S economic growth growth, and
Slide 20: 3Q12 Consolidated Financial Highlights
3Q12 Consolidated Financial Highlights CNO Results Reflect Significant Management Actions - Lower-for-longer rates prudently reflected in core assumptions - OCB litigation reserves set the stage for less volatility - Stable core earnings supports tax valuation allowance reduction - Recapitalizatio
Slide 21: Segment EBIT - Excluding Significant Items
Segment EBIT - Excluding Significant Items* ($ millions) CNO $125.6 $3.3 CNO’s Earnings Engine $10.4 $88 6 $88.6 42% Bankers premium growth, favorable $15.8 $33.9 Medicare supplement benefit ratios and annuity persistency $27.2 $ Washington National favorable supplemental health benefit ratios $
Slide 22: Impact Analysis: Low-For-Long Rates
Impact Analysis: Low-For-Long Rates CNO $28 million after-tax earnings Assumption: Charge reflects current new money rates and a charge in 3Q 50 basis point reduction to the ultimate rate Represents R t management’s t’ best b t estimates ti t andd considers id the th ffollowing: ll i - Fed’s desir
Slide 23: GAAP Balances for Deferred Tax Asset as of 9/30/12
GAAP Balances for Deferred Tax Asset as of 9/30/12: Loss Carryforwards – Gross1 vs. vs Net2 CNO ($ millions) Totals Gross Loss Carryforwards $1,672 3 Gross Valuation Allowance ((779)) $1,092 Net Loss Carryforwards $893 GAAP Valuation Allowances Net $143mm decrease in Non-life decrease driven by al
Slide 24: Capital Position - Post Recapitalization
Capital Position - Post Recapitalization CNO ($ millions) RBC Ratio 2Q12 3Q12 369% 361% Insurance Company Capitalization – RBC held steady in 3Q and reflects: • Statutory operating income of $60mm • OCB litigation reserves • Security impairments • $95mm of statutory dividends in 3Q Leverage 3Q12 2
Slide 25: Capital Generation - $500 Million Run-Rate
Capital Generation - $500 Million Run-Rate CNO ($ millions) 9-month statutory operating earnings of $243mm and statutory dividends of $198mm Anticipate statutory dividends to the holding company of $250mm - $275mm in 2012 2010 2011 YTD 3Q12 $500.8 $154.1 $389.7 $346.7 $358.4 $95.5 $45.4 $313.0 $
Slide 26: Free Cash Flow
Free Cash Flow CNO Sources Building While Recurring Uses Moderating ($ in millions) 9 - Month 2012: Capital Generation & Free Cash Flow $358 Observations $45 $313 RBC $50mm above 350% RBC target Deployable holdco capital of $150mm ($52) Modest capital p required q to support pp business ($15)
Slide 27: CNO: Well Positioned in Growing & Underserved Markets
CNO: Well Positioned in Growing & Underserved Markets The middle-income, pre-retiree and retirement markets are growing as the Baby Boomers age These markets need straightforward products that help address healthcare expenditures, retirement, and leaving a legacy for loved ones We are well pos
Slide 28: 2012 CNO Investor Day in NYC
2012 CNO Investor Day in NYC CNO will be hosting an Investor Day on Thursday, December 13, 2012 in NYC Invitations will be sent and additional details posted to our website in the coming weeks The event will be available via webcast CNO Financial Group 28
Slide 29: Questions and Answers
Questions and Answers CNO Financial Group 29
Slide 30: Appendix
Appendix CNO Financial Group 30
Slide 31: 3Q12 Significant Items
3Q12 ($ millions) Significant Items CNO The table below summarizes the financial impact of significant items on our 3Q12 net operating income. Management believes that identifying the impact of these items enhances the understanding of our operating results during 3Q12. Three months ended September
Slide 32: 3Q11 Significant Items
3Q11 Significant Items CNO ($ millions)) The table below summarizes the financial impact of significant items on our 3Q11 net operating income. Management believes that identifying the impact of these items enhances the understanding of our operating results during 3Q11. Three months ended September
Slide 33: Quarterly Earnings
Quarterlyy Earnings g CNO ($ millions) 3Q11 4Q11 1Q12 2Q12 3Q12 Bankers Life $ 79.4 $ 77.2 $ 70.5 $ 76.1 $ 80.6 Washington National 21.2 28.8 24.7 33.9 33.9 Colonial Penn (1 3) (1.3) 18 1.8 (9 8) (9.8) 06 0.6 (2 6) (2.6) Other CNO Business 2.8 - (2.3) 1.9 (53.6) EBIT* from business segments 102.1 10
Slide 34: 3Q12 Holding Company Liquidity
3Q12 Holding Company Liquidity CNO ($ millions) YTD 3Q12 2012 Cash and Investments Balance - Beginning $197.7 $202.8 * Sources Dividends from Insurance Subsidiaries 95.0 198.0 Dividends from Non-insurance Subsidiaries 2.0 6.0 Interest/Earnings on Corporate Investments 8.3 22.1 Surplus Debenture Inte
Slide 35: Debt Maturity Profile
Debt Maturity Profile CNO ($ millions) $403 $275 $403 $154 $275 (1) $ $93 $79 $54 $61 $61 $79 $61 $14 $54 $4 $14 $4 2012 2013 2014 2015 2016 2017 2018 2019 2020 Term Loan Convertible$74 Senior Unsecured Debentures Senior Secured Notes (1) Conversion price is $5.49. CNO can force conversion after 6/3
Slide 36: GAAP Valuation Allowance Model
GAAP ($ millions) Valuation Allowance Model CNO Life NOLs Non-life NOLs expiring expiring expiring Capital loss through 2023 through 2023 Post 2023 carryforwards Total Net operating loss (“NOL”) NOL carryforwards $ 1,416 $ 1,972 $ 516 $ 872 $ 4,776 Potential unfavorable IRS ruling (631) 631 - - - NO
Slide 37: Long Term Care Bankers Life
Long Term Care Bankers Life Proactive management of risk and profitability in effort to create 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 of r
Slide 38: Commercial Mortgage Loans at 9/30/12
Commercial Mortgage Loans at 9/30/12 CNO By Vintage By Property Type Other Mixed Multi 3.4% Multi- 2.9% 2012 Family 7.5% 2011 6.2% 5.4% 2009 2004 and Industrial 2010 0.5% Prior 16.9% 4.9% 22 3% 22.3% 2005 7.4% 2008 18.4% Retail 37.3% Office 33 3% 33.3% 2006 2007 15.2% 18.4% 6.3% of invested assets
Slide 39: Commercial Mortgage Loans Portfolio at 9/30/12
Commercial Mortgage Loans CNO P tf li att 09/30/12 Portfolio ($ millions) $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $- 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026+ CNO Financial Group Run-off of Principal of Current CML Portfolio Principal Maturities by Year 39
Slide 40: European Debt by Select Countries
European Debt by Select Countries CNO ($ millions) We have limited direct exposure to the European credit markets Market / Total Sovereigns Corporates Banks Total Market BV Issuers Italy $ - $ 26.1 $ - $ 26.1 $ 24.1 92% 1 Spain p - 64.6 27.9 92.5 86.2 93% 2 Total $ - $ 90.7 $ 27.9 $ 118.6 $ 110.3 93
Slide 41: 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
Slide 42: Information Related to Certain Non-GAAP Financial Measures
Information Related to Certain Non-GAAP Financial Measures A reconciliation of net income (loss) applicable to common stock to net operating income (and related per-share amounts) is as follows (dollars in millions, except per-share amounts): 3Q11 4Q11 1Q12 2Q12 3Q12 Net income (loss) applicable to
Slide 43: 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): 3Q11 4Q11 1Q12 2Q12 3Q12 Operating inco
Slide 44: 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
Slide 45: 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
Slide 46: 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
Slide 47: 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 September 30, 2012, is as follows (dollars in millions): Bankers Washing
Slide 48: 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
Slide 49: 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
Slide 50: 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) and as defined in our New Senior Secured Credit Agreement The debt to capital ratio, excluding accumulated other comprehensive income (loss), differs from the deb