Cno Financial Group, Inc. · NYSE:CNO
Cno Financial — Q1 2011 Earnings Presentation
65 slides from Cno Financial's earnings presentation, May 3, 2011
Slide 1: 1Q11 Financial and operating results for the period ended March 31, 2011
1Q11 Financial and operating results for the period ended March 31, 2011 May 3, 2011 Unless otherwise specified, comparisons in this presentation are between 1Q11 and 1Q10. Exhibit 99.1
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
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
Slide 4: CNO Financial Group
E] CNO FINANCIAL GROUP
Slide 5: 1Q11: Summary
1Q11: Summary CNO § Net income of $53.9 million, compared to $33.9 million § Net operating income* up 36% to $51.9 million, or 18 cents per diluted share § Consolidated RBC at 341%, up 9 percentage points from 12/31/10 – Driven by statutory earnings of $101 million – Partially offset by $60 million
Slide 6: 1Q11 Summary of Results
1Q11 Summary of Results CNO ($ millions, except per-share amounts)
Slide 7: Quarterly Earnings
Quarterly Earnings CNO *Management believes that an analysis of earnings before net realized investment gains (losses), corporate interest, loss on extinguishment of debt and taxes (“EBIT,” a non-GAAP financial measure) provides a clearer comparison of the operating results of the company quarter- o
Slide 8: Operating ROE, Trailing 4 Quarters
Average common shareholders’ equity, excluding AOCI/L and net operating loss carryforwards, trailing 4 quarters: $2,679.2 $2,808.3 $2,942.8 $3,048.5 $3,129.7 Operating ROE CNO Operating ROE*, Trailing 4 Quarters *Operating return excludes loss on extinguishment of debt, net realized investment gains
Slide 9: Operating EPS (Diluted)
Weighted average diluted shares (in millions)**: 292.1 302.6 306.0 306.7 307.5 Operating EPS* (Diluted) § Increased EPS despite dilution * Operating earnings per share exclude loss on extinguishment of debt, net realized investment gains (losses) and valuation allowance related to deferred tax asset
Slide 10: Book Value
Book Value CNO *See Appendix for a reconciliation to the corresponding GAAP measure. ($ millions, except per-share amounts) Book value per diluted share (excluding AOCI/L) as of March 31, 2011 was $14.37
Slide 11: Pre/After Tax GAAP Operating Income
Pre/After Tax GAAP Operating Income CNO ($ millions) $350.0 $300.0 $302.4 $281.6 $252.3 $250.0 $106.8 $99.7 $200.0 $150.0 $100.0 — ene $195.6 $50.0 $0.0 ——— — 2009 2010 LTMas of 3/31/2011 CNet Operating Income Ml Tax Accounting Expense on Operating Income
Slide 12: Statutory Earnings Power
Statutory Earnings Power CNO ($ millions) $500.0 $472.0 $450.0 $406.6 $411.6 $400.0 $134.4 $350.0 $300.0 $250.0 $200.0 $337.6 $150.0 Gees $279.2 $100.0 $50.0 $0.0 2009 2010 LTMas of 3/31/2011 aPre-Tax Operating Income mi Fees and Interest to Holding Company
Slide 13: Financial Strength
21.6% 21.3% 21.2% 20.0% 19.2% Debt to Total Capital Ratio** Financial Strength CNO § RBC increased to 341% in 1Q11 – Positive impact primarily from statutory operating income of $101 million (+21 points) – Partially offset by dividend payments to our holding company of $60 million (-13 points) * Ris
Slide 14: Bankers Life: 1Q Summary
§ Earnings of $63.9 million, up 20% – Results were favorably impacted by: • $14 million from improved spreads and growth in the annuity block • $11 million due to favorable reserve impacts in long-term care • $7 million due to favorable claim development in Medicare supplement – Medicare supplement
Slide 15: Bankers Life: Sales and Distribution Results
Med supp policies issued (in thousands): 10.6 12.6 10.2 19.7 11.4 Sales and Distribution Results § Mixed sales results – Continued strong life sales, up 5% – Lower Med supp sales, down 5%, and LTC sales, down 19%, impacted by consumer preference for lower cost products Bankers Life Quarterly NAP* *P
Slide 16: Medicare Supplement Update
Medicare Supplement Update Bankers Life § Industry and Competition – Leading competitor pulling Plan N and significantly increasing rate on in- force and new business – Bankers plans to take no pricing actions this year, as product is performing to profit expectations § 1Q11 Highlights – 5% decline
Slide 17: Bankers Life: LTC Update
Bankers Life § Stable financial results – Continued claims management improvements contributed to $11 million favorable reserve development in 1Q11 § Rate increase filings continue – Filing for increases on most plans sold between 2002 and 2005 – Filing for increases on inflationary plans sold betwe
Slide 18: Bankers Life: Quarterly Earnings
Quarterly Earnings Management believes that an analysis of income before net realized investment gains (losses), net of related amortization (a non-GAAP financial measure), is important to evaluate the financial performance of our business, and is a measure commonly used in the life insurance indust
Slide 19: Washington National: 1Q Summary
1Q Summary Washington National § Earnings of $25.2 million, down $2.4 million primarily from favorable reserve refinements related to our life products in 1Q10 § Sales (NAP) of $17 million, up 3% – Supplemental health NAP of $15.7 million, up 7% § Solid recruiting results for the WNIC Independent ch
Slide 20: Washington National: 1Q11 Sales Results
Washington National § Supplemental health sales up 7% § Life sales up 7% 1Q10 NAP 1Q11 NAP 1Q11 Sales Results ($ millions)
Slide 21: Washington National: Quarterly Earnings
Quarterly Earnings Washington National Management believes that an analysis of income (loss) before net realized investment gains (losses), net of related amortization (a non- GAAP financial measure), is important to evaluate the financial performance of our business, and is a measure commonly used
Slide 22: Colonial Penn: 1Q Summary
§ Earnings of $5.4 million, compared to $5.3 million § Sales growth continues, NAP up 4% 1Q Summary Colonial Penn
Slide 23: Colonial Penn: Quarterly Earnings
Quarterly Earnings Colonial Penn Management believes that an analysis of income before net realized investment gains (losses), net of related amortization (a non-GAAP financial measure), is important to evaluate the financial performance of our business, and is a measure commonly used in the life in
Slide 24: Other CNO Business: 1Q Summary
§ Earnings of $7.1 million, compared to loss of $1.9 million – Favorable mortality in 1Q11 – Results in 1Q10 were unfavorably impacted by changes in assumptions related to when certain non-guaranteed elements will be implemented 1Q Summary Other CNO Business
Slide 25: Other CNO Business: Quarterly Earnings (Losses)
Quarterly Earnings (Losses) Other CNO Business Management believes that an analysis of income (loss) before net realized investment gains (losses), net of related amortization (a non- GAAP financial measure), is important to evaluate the financial performance of our business, and is a measure common
Slide 26: Summary of Proposed Amendments to Senior Secured Credit Facility
Summary of Proposed Amendments to Senior Secured Credit Facility* CNO * There can be no assurance that the proposed amendments will be achieved § Reduce spread by 100 bps to L+500 bps and reduce the LIBOR floor by 25 bps to 1.25% § Introduce step downs for mandatory prepayments due to Restricted Pay
Slide 27: Excess Capital Utilization Opportunities
Excess Capital Utilization Opportunities § Debt Prepayment § Share Buybacks § Common Stock Dividends § Investing in Business for Additional Growth § Build Holding Company Investment Portfolio – Utilize non-life operating loss carryforward CNO
Slide 28: Net Loss Carryforwards
Net Loss Carryforwards GAAP Balances for Deferred Tax Asset as of 3/31/11: Loss Carryforwards - Gross 1 vs. Net 2 ($ millions) 1. Gross loss carryforward equals the total life (including state operating loss carryforwards), non-life, and capital loss carryforwards multiplied by a 35% tax rate 2. Net
Slide 29: Net Investment Income
Earned Yield: 5.76% 5.83% 5.86% 5.77% 5.79% Earned Yield (excluding floating rate FHLB): 5.76% 5.83% 5.87% 5.84% 5.90% New Money Rate (excluding floating rate FHLB): 6.21% 6.26% 6.00% 5.96% 5.60% Net Investment Income CNO § Increase in investment income primarily due to growth in assets § Implemente
Slide 30: Realized Gains/Losses Recognized through Net Income
Realized Gains/Losses Recognized through Net Income CNO ($ millions)
Slide 31: Unrealized Gain/Loss
Unrealized Gain/Loss* CNO ($ millions) *Includes debt and equity securities classified as available for sale. Excludes investments from variable interest entities which we consolidate under GAAP.
Slide 32: 1Q11 Impairments
1Q11 Impairments CNO ($ millions)
Slide 33: Asset Allocation at 3/31/11
Asset Allocation at 3/31/11* CNO *Excludes investments from variable interest entities which we consolidate under GAAP (the related liabilities are non-recourse to CNO). ($ millions)
Slide 34: Investment Quality: Fixed Maturities
% of Bonds which are Investment Grade: 3/31/10 93% 6/30/10 92% 9/30/10 92% 12/31/10 91% 3/31/11 90% AA 9% A 23% BBB 45% Investment Quality: Fixed Maturities* CNO § 90% investment grade § Favorable corporate bond ratings trends § RMBS Ratings erosion due to seasoning effect (no NAIC RBC impact) Fixed
Slide 35: Alt-A at 3/31/11
Alt-A at 3/31/11 CNO § 1.3% of total invested assets § 100% NAIC 1 classification § Collateral performing better than overall Alt-A collateral universe in terms of delinquency and accumulated loss trends § All securities evaluated using market-consistent estimates of future collateral performance §
Slide 36: Prime Jumbo at 3/31/11
Prime Jumbo at 3/31/11 CNO § 4.6% of total invested assets § 99.3% NAIC 1 classification § Substantial proportion of investments purchased at discounts reflective of current market expectations for cash flows from collateral § All securities evaluated using market-consistent estimates of collateral
Slide 37: CMBS at 3/31/11
Pre-2004 18.8% 2005 23.0% 2006 19.2% CMBS at 3/31/11 CNO ($ millions) 11.5% 21.9% 3.7% 1.4% .5%
Slide 38: CMBS at 3/31/11
CMBS at 3/31/11 CNO § 5.9% of invested assets § 99.6% NAIC 1 classification § Collateral performing materially better than overall CMBS collateral universe in terms of delinquency and cumulative loss § All securities evaluated using market-consistent estimates of collateral performance § Substantial
Slide 39: Commercial Mortgage Loans at 3/31/11
2008 18.8% 2006 18.4% 2005 9.5% Office 36.9% Retail 40.1% Industry 18.0% Commercial Mortgage Loans at 3/31/11 By Vintage CNO By Property Type § Trailing debt service coverage ratio (DSCR) stable at approximately 1.39 § As of 3/31/11, 1 delinquent loan ($.1mm unpaid balance) 4.7% 0.4% 20.4% 2004 and
Slide 40: Summary
Summary § Solid earnings continued in 1Q § Capital generation creates unique opportunities – Generating significant amounts of excess capital – Retaining more capital in holding company to generate more non-life income and utilize operating loss carryforwards § Continued emphasis on profitable growt
Slide 41: Questions and Answers
Questions and Answers
Slide 42: Appendix
Appendix
Slide 43: Covenant Metrics
Covenant Metrics Interest Coverage Ratio Statutory Surplus ($ millions) * Excludes Accumulated Other Comprehensive Income (Loss), as defined by the senior credit facility ** Not applicable to periods prior to 3/31/11 $1,200 CNO 225% Covenants levels per agreement 2.0 ** ** ** **
Slide 44: 1Q11 Holding Company Liquidity
1Q11 Holding Company Liquidity CNO ($ millions)
Slide 45: Debt Maturity Profile
2011 - 2018 2011 - 2018 Term Loan Sr. Health Note Convertible 9% Notes Sr. Health Note Convertible Debentures Sr. Credit Facility (1) Conversion price is $5.49. CNO can force conversion after 6/30/13 if CNO stock trades above $7.69 for 20 or more days in a consecutive 30 day trading period. On 3/31/
Slide 46: Operating Return on Allocated Capital Computation
Operating Return on Allocated Capital Computation* Adjusted operating earnings for the purpose of calculating operating return on allocated capital is determined as follows: Allocated capital is calculated as follows: * A non-GAAP financial measure. Refer to the Appendix for a reconciliation to the
Slide 47: Commercial Mortgage Loans at 3/31/11
Commercial Mortgage Loans at 3/31/11 CNO Pacific 9.8% Mountain 10.2% West North Central 13.8% West South Central 6.2% East North Central 15.8% East South Central 3.1% New England 8.9% Middle Atlantic 8.4% South Atlantic 23.8%
Slide 48: Commercial Mortgage Loans at 3/31/11
Commercial Mortgage Loans at 3/31/11 Remaining Principal Balance By Maturity CNO ($ millions)
Slide 49: Premiums Collected
Premiums Collected CNO § Trailing 4 quarters down 9% – Stable results at Bankers Life (excluding PFFS), Washington National, and Colonial Penn – Decline at OCB primarily due to continued run-off of inforce blocks, as expected CP Washington National Collected Premiums -Trailing 4 Quarters 1Q10 $3,937
Slide 50: Premiums Collected - Med Supp
PFFS policies issued: 22.8 -0.4 0.1 0.4 9.7 PDP policies issued: 8.0 0.3 1.0 0.4 8.1 Med Supp First-Year Prems.-Tr. 4 Qtrs: $99.2 $107.5 $114.1 $116.4 $114.3 Med Supp Total Premiums-Quarterly: $176.6 $168.8 $170.1 $182.3 $178.8 Med Supp NAP-Quarterly: $19.4 $21.0 $16.0 $31.8 $18.3 Med Supp NAP-Trail
Slide 51: Premiums Collected - LTC
Premiums Collected - LTC § Net first-year premiums up 27%, reflecting reduction in new business reinsurance First-Year Prems.-Tr. 4 Qtrs: $18.3 $19.1 $21.9 $22.2 $23.5 Total Premiums-Quarterly: $149.5 $146.6 $145.0 $143.5 $144.9 Long-Term Care - First-Year Premiums* NAP-Quarterly: $8.6 $8.7 $7.2 $6.
Slide 52: Premiums Collected - Life
$10.6 $13.7 Premiums Collected - Life § First-year premiums up 22% First-Year Prems.-Tr. 4 Qtrs: $86.0 $91.4 $93.8 $97.7 $102.2 Total Premiums-Quarterly: $46.5 $52.1 $54.8 $56.2 $56.4 Life - First-Year Premiums NAP-Quarterly: $15.8 $17.3 $16.3 $15.9 $16.6 NAP-Trailing 4 Quarters: $60.9 $62.6 $63.1 $
Slide 53: Premiums Collected - Annuity
Premiums Collected - Annuity § First-year premiums down 1% First-Year Prems.-Tr. 4 Qtrs: $979.1 $984.4 $965.1 $1,001.2 $999.4 Total Premiums-Quarterly: $224.4 $281.1 $265.8 $234.4 $222.2 Annuity - First-Year Premiums Bankers Life ($ millions)
Slide 54: Premiums Collected - Supplemental Health
Premiums Collected - Supplemental Health Washington National § First-year premiums up 6% – Increased focus on supplemental health products First-Year Prems.-Tr. 4 Qtrs: $47.7 $49.7 $50.9 $52.0 $52.7 Total Premiums-Quarterly: $99.6 $100.2 $101.5 $104.2 $106.5 Supplemental Health - First-Year Premiums
Slide 55: Premiums Collected - Life (Colonial Penn)
Premiums Collected - Life Colonial Penn § First-year premiums up 10% First-Year Prems.-Tr. 4 Qtrs: $31.7 $31.4 $31.6 $32.3 $33.1 Total Premiums-Quarterly: $47.3 $46.7 $46.9 $46.8 $49.4 Life - First-Year Premiums NAP-Quarterly: $13.1 $12.2 $11.5 $9.5 $13.6 NAP-Trailing 4 Quarters: $42.7 $44.3 $45.2 $
Slide 56: 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 57: 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):
Slide 58: Reconciliation of operating income and shares for EPS
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): Information Related to Certain Non-GAAP Financial Measures
Slide 59: 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 60: 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, and increases or decreases to our valuation allowance for deferred tax assets (“net operating incom
Slide 61: 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 62: 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 ended March 31, 2011, is as follows (dollars in millions): (Continued on
Slide 63: 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 64: 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 65: Information Related to Certain Non-GAAP Financial Measures
Information Related to Certain Non-GAAP Financial Measures A reconciliation of the debt to capital ratio to debt to capital, as defined in our Senior Secured Agreement is as follows (dollars in millions) Debt to capital ratio, excluding accumulated other comprehensive income (loss) This non-GAAP fin