Cno Financial Group, Inc. · NYSE:CNO
Cno Financial — Q3 2010 Earnings Presentation
79 slides from Cno Financial's earnings presentation, Nov 3, 2010
Slide 1: 3Q10 Financial and Operating Results
3Q10 Financial and operating results for the period ended September 30, 2010 NOVEMBER 3, 2010 Unless otherwise specified, comparisons in this presentation are between 3Q10 and 3Q09. 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 this press release relative to markets for CNO Financial’s products and trends in CNO Financial’s operations or financial results, as well as other
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
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Slide 8: CNO Financial Group
E] CNO FINANCIAL GROUP
Slide 9: 3Q10: Summary
3Q10: Summary CNO § Net income of $49.4 million, up 221% § Net operating income* of $47.1 million, down 13% – 16 cents per diluted share, reflecting dilution from issuance of shares of common stock and convertible debentures, and more than 4 cents per share of intangible write-downs § Consolidated R
Slide 10: 3Q10 Summary of Results
3Q10 Summary of Results CNO ($ millions, except per-share amounts) *Management believes that an analysis of earnings before net realized investment gains (losses) (a non-GAAP financial measure) provides an alternative measure of the operating results of the company because such items are unrelated t
Slide 11: Quarterly Earnings
Quarterly Earnings CNO Consolidated *Management believes that an analysis of earnings before net realized investment gains (losses), corporate interest, loss on extinguishment or modification of debt and taxes (“EBIT,” a non-GAAP financial measure) provides a clearer comparison of the operating resu
Slide 12: Operating ROE, Trailing 4 Quarters
Average common shareholders’ equity, excluding AOCI/L and net operating loss carryforwards, trailing 4 quarters ($ mils): $2,503.9 $2,551.1 $2,679.2 $2,808.3 $2,942.8 Operating ROE CNO Operating ROE*, Trailing 4 Quarters *Operating return excludes gain (loss) on extinguishment or modification of deb
Slide 13: Operating EPS (Diluted)
Weighted average diluted shares (in millions): 185.8 217.5 292.1 302.6 306.0 Operating EPS (Diluted)* *Operating earnings per share exclude loss on extinguishment or modification of debt, net realized investment gains (losses) and valuation allowance related to deferred tax assets. See Appendix for
Slide 14: Book Value
Book Value CNO *See Appendix for a reconciliation to the corresponding GAAP measure. (in millions, except per-share amounts) Book value per diluted share as of September 30, 2010 was $13.70 – Excludes AOCI – Includes the effects of converting the $293.0 million of 7.0% debentures
Slide 15: Pre/After Tax GAAP Operating Income
OOOO Pre/After Tax GAAP Operating Income CNO ($ in millions) $252.3 $251.3 $250.0 $223.4 $200.0 $150.0 $100.0 $164.6 $162.2 $137.0 $50.0 $0.0 2008 2009 LTM* 3010 Net Operating Income Tax Expense on Operating Income * Last twelve months
Slide 16: Statutory Earnings Power
Statutory Earnings Power CNO ($ in millions) $400.0 1379.8 $350.0 | $335.0 $115.8 $300.0 | $250.0 $241.3 $200.0 | $150.0 | $264.0 $100.0 | $203.5 #00 | $120.2 $0.0 2008 2009 LTM* 3Q10 [Post-Tax Operating Income Fees and Interest Paid to Holding Company
Slide 17: Financial Strength
Financial Strength CNO *Risk-Based Capital (“RBC”) requirements provide a tool for insurance regulators to determine the levels of statutory capital and surplus an insurer must maintain in relation to its insurance and investment risks. The RBC ratio is the ratio of the statutory consolidated adjust
Slide 18: Bankers Life: 3Q Summary
3Q Summary Bankers Life § Earnings of $95.5 million, up 12% – Increased earnings of $20 million due primarily to: • Higher average yields on a larger asset base • Improved Med Supp benefit ratio – Partially offset by lower PFFS earnings of approximately $13 million • 3Q2009 favorably impacted by pri
Slide 19: Bankers Life: Sales and Distribution Results
PFFS policies issued: -0.2 -1.0 22.8 -0.4 0.1 PDP policies issued: 3.8 1.3 8.0 0.2 1.1 Bankers Life ($ millions) Quarterly NAP* *PFFS and PDP sales are not comparable and are excluded from NAP in all periods; in addition, we no longer assume any of the risks on PFFS contracts through reinsurance. Po
Slide 20: Bankers Life: Total Producers
Bankers Life 5,258 5,309 5,312 5,353 § Recruiting is down versus 2009, but comparable to 2008 levels § Producer force has remained stable Total Producers
Slide 21: Bankers Life: Med Supp Highlights and Strategy
§ Maintain pricing discipline; introduced new lower cost, cost sharing product (Plan N) § Application submissions are flat to prior year, the mix is shifting to these lower premium plans but still maintains target margins and allows us to penetrate more households § Distribution is prepared to capit
Slide 22: Bankers Life: LTC Rate Increase
Bankers Life § For policies generally sold: – Between 1992-2003 we will be filing for an additional increase ONLY on plans with inflation protection – Between 2002-2005 we will be filing for an additional increase on ALL plans § For these two blocks, we will be filing for additional premium increase
Slide 23: Bankers Life: Quarterly Earnings
Quarterly Earnings ($ millions) 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 ins
Slide 24: Splitting the CIG Segment
Splitting the CIG Segment Washington National and OCB § Two new segments, consistent with how we are managing our business – Washington National (primarily actively marketed lines of business) • Markets and distributes supplemental health and traditional life insurance to middle- income consumers at
Slide 25: Washington National: 3Q Summary
3Q Summary Washington National § Earnings of $27.2 million, down 6.5% – 3Q2009 favorably impacted by reserve refinements related to supplemental health (comprised of specified disease, accident and hospital indemnity policies) of approximately $4 million § Sales (NAP) of $19 million, down 4% – Decre
Slide 26: Washington National: Sales Results
Washington National ($ millions) § Supplemental health sales up 11% – PMA up 15% – WNIC* Independent flat § WNIC Independent voluntary worksite sales up 8% – Up 22% YTD vs. 2009 3Q09 NAP 3Q10 NAP 3Q10 Sales Results * Washington National Insurance Company
Slide 27: 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 28: Colonial Penn: 3Q Summary
3Q Summary Colonial Penn § Earnings of $7.8 million, up 5.4% – Results for 3Q2010 reflect favorable life margins § Sales growth continues: NAP up 8% – YTD sales up 10% – YTD lead generation up 42%
Slide 29: Colonial Penn: Quarterly Earnings
Quarterly Earnings Colonial Penn ($ millions) 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 i
Slide 30: Other CNO Business: 3Q Summary
3Q Summary Other CNO Business § Loss of $24.4 million, compared to loss of $7.5 million – Reduction in earnings of approximately $13 million due to additional amortization expense related to interest sensitive products – Reduction in earnings of approximately $6 million due to the write -off of PVFP
Slide 31: Sharpened Focus
Sharpened Focus § Segmentation provides transparency and brings strong focus on addressing such issues as: – Non-Guaranteed Element Management – Expense Management – Risk Mitigation § Requires a methodical approach § Near term results expected to continue exhibiting volatility – Portions of the busi
Slide 32: Other CNO Business: Quarterly Earnings (Losses)
Quarterly Earnings (Losses) Other CNO Business Management believes that an analysis of income (loss) before net realized investment gains (losses), net of related amortization (a non- GAAP financial measure), is important to evaluate the financial performance of our business, and is a measure common
Slide 33: Addressing the Low Interest Rate Environment
CNO § Reduced guaranteed minimum interest rates for most interest sensitive product sales § Lowering credited rates § Reduced commissions § Factoring future premiums into our LTC liability duration and invested to match these longer durations – Durations on our LTC business are long, but shorter tha
Slide 34: Net Investment Income
Yield: 5.62% 5.63% 5.76% 5.83% 5.86% Net Investment Income CNO ($ millions) General Account Investment Income § 3Q10 portfolio yield increase due primarily to sustained new money rates exceeding portfolio rate
Slide 35: Realized Gains/Losses Recognized through Net Income
Realized Gains/Losses Recognized through Net Income CNO
Slide 36: 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. 3Q09 4Q09 1Q10 2Q10 3Q10
Slide 37: Realized Losses by Security Type
($ millions) Amount Amount Recognized Recognized Gross through through Net Amounts AOCI/L Income Corporates $1.5 $0.0 $1.5 AltA 0.0 (1.7) 41.7 CMBS 14 0.0 14 Commercial Mortgage Loans 14.0 0.0 14.0 Other 5.9 0.0 5.9 Total $22.8 G17) $245
Slide 38: Asset Allocation at 9/30/10
Asset Allocation at 9/30/10* CNO ($ millions) *Excludes investments from variable interest entities which we consolidate under GAAP (the related liabilities are non-recourse to CNO).
Slide 39: Investment Quality: Fixed Maturities
% of Bonds which are Investment Grade: 9/30/09 93% 12/31/09 93% 3/31/10 93% 6/30/10 92% 9/30/10 92% Investment Quality: Fixed Maturities* CNO Fixed Maturities, available for sale, by Rating at 9/30/10 (Market Value) *Excludes investments from variable interest entities which we consolidate under GAA
Slide 40: Alt-A at 9/30/10
Alt-A at 9/30/10 CNO § 0.9% of total invested assets § Substantial proportion of investments purchased at discounts reflective of current market expectations for cash flows from collateral § Collateral performing better than overall Alt-A collateral universe in terms of delinquency and accumulated l
Slide 41: Prime Jumbo at 9/30/10
Prime Jumbo at 9/30/10 CNO § 3.4% of total invested assets § 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 performance § Credit support r
Slide 42: CMBS at 9/30/10
CMBS at 9/30/10 CNO (GAAP book value - $ millions) Pre-2004 20.6% 12.4% 24.5% 14.9% 22.2% 5.4%
Slide 43: CMBS at 9/30/10
CMBS at 9/30/10 CNO § 5.7% of invested assets § 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 credit support inherent in st
Slide 44: Commercial Mortgage Loans at 9/30/10
Commercial Mortgage Loans at 9/30/10 CNO By Property Type § Current LTV of approximately 63% § Trailing debt service coverage ratio (DSCR) stable at approximately 1.48 2.5% 0.4% 18.1% 20.6% 19.3% 12.0% 2004 and Prior 27.1% Office 37.5% Indus. 17.4% Other 0.2% Retail 39.8% Multi- Family 5.1%
Slide 45: Summary
Summary CNO § Stabilized earnings, generating excess capital § Completed WNIC merger and CIG re-segmentation § Focused on profitable growth § Strengthened liquidity, improved RBC § Positioned for early debt refinancing
Slide 46: Questions and Answers
Questions and Answers
Slide 47: Appendix
Appendix
Slide 48: Terminology Changes
We will also be making the following terminology changes in our financial reports to more accurately describe our business and/or for consistency with industry peers . (1) Includes specified disease, accident, and hospital indemnity products (2) Includes supplemental health, Medicare supplement, and
Slide 49: Covenant Metrics
Statutory Surplus ($ millions) *Also applicable in 2010 for Debt to Capital ratio only. **Excludes Accumulated Other Comprehensive Income (Loss), as defined by the senior credit facility. $1,200 $1,100 Prior Amendment Level New 2011 Level* New 2012 Level CNO 250% 200% 1.5x 2.0x 1.75x 225% $1,300 Cov
Slide 50: 3Q10 Liquidity
3Q10 Liquidity CNO ($ millions)
Slide 51: 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 corresponding GAAP measure. Operating Return on All
Slide 52: Commercial Mortgage Loans at 9/30/10
Commercial Mortgage Loans at 9/30/10 CNO Pacific 9.9% Mountain 9.9% West North Central 12.3% West South Central 6.1% East North Central 17.2% East South Central 5.7% New England 8.7% Middle Atlantic 8.2% South Atlantic 22.0%
Slide 53: Commercial Mortgage Loans by Maturity
Commercial Mortgage Loans at 9/30/10 By Maturity CNO ($ millions)
Slide 54: Collected Premiums
Collected Premiums CNO § Trailing 4 quarters down 17% – Decline at Bankers Life due to termination of PFFS reinsurance contracts and lower annuity sales, as expected – Consistent growth at Colonial Penn – Slight decline at Washington National primarily due to Wilton Re transaction in 3Q2009 – Declin
Slide 55: Segment Performance: Bankers Life
Segment Performance Bankers Life *Operating earnings exclude net realized gains (losses). See Appendix for corresponding GAAP measure of our consolidated results of operations. PTOI-Trailing 4 Quarters: $233.4 $278.0 $286.5 $287.2 $297.3 Revenues-Quarterly: $695.1 $654.5 $584.4 $563.9 $617.2 Pre-Tax
Slide 56: Premiums - Med Supp
Premiums - Med Supp § First-year premiums up 29% Med Supp - First-Year Premiums Med Supp First-Year Prems.-Tr. 4 Qtrs: $86.5 $91.7 $99.2 $107.5 $114.1 Med Supp Total Premiums-Quarterly: $168.9 $173.8 $176.6 $168.8 $170.1 Med Supp NAP-Quarterly: $19.9 $56.8 $19.4 $21.0 $16.0 Med Supp NAP-Trailing 4 Q
Slide 57: Premiums - Long-Term Care
Premiums - Long-Term Care ($ millions) First-Year Prems.-Tr. 4 Qtrs: $22.1 $17.7 $18.3 $19.1 $21.9 Total Premiums-Quarterly: $154.3 $149.5 $149.5 $146.6 $145.0 Long-Term Care - First-Year Premiums* NAP-Quarterly: $9.8 $8.3 $8.6 $8.7 $7.2 NAP-Trailing 4 Quarters: $35.0 $35.4 $36.5 $35.4 $32.8 *Includ
Slide 58: Premiums - Life Insurance
$12.9 $13.9 Premiums - Life Insurance ($ millions) First-Year Prems.-Tr. 4 Qtrs: $79.8 $82.6 $86.0 $91.4 $93.8 Total Premiums-Quarterly: $63.2 $61.4 $46.5 $52.1 $54.8 Life - First-Year Premiums NAP-Quarterly: $15.8 $13.7 $15.8 $17.3 $16.3 NAP-Trailing 4 Quarters: $55.4 $57.7 $60.9 $62.6 $63.1 SPWL N
Slide 59: Premiums - Annuity
Premiums - Annuity ($ millions) First-Year Prems.-Tr. 4 Qtrs: $1,270.3 $1,057.1 $979.1 $984.4 $965.1 Total Premiums-Quarterly: $284.7 $198.2 $224.4 $281.1 $265.8 Annuity - First-Year Premiums Bankers Life § First-year premiums down 7%
Slide 60: Annuity Surrenders
Annuity Surrenders IA Surrenders (annualized quarterly rate) Non-IA Surrenders (annualized quarterly rate) Bankers Life § Total account value: – IAs - $1.9 billion – Non-IAs - $4.8 billion § Average account value: – IAs - $1.8 – Non-IAs - $4.8 billion – IAs - 96% – Non-IAs - 86%
Slide 61: Benefit Ratio - PDP
Benefit Ratio* - PDP *We calculate benefit ratios by dividing insurance policy benefits by insurance policy income. Bankers Life § Down 3.6 points, impacted by improved pricing and plan design changes
Slide 62: Benefit Ratio - Med Supp
Benefit Ratio* - Med Supp *We calculate benefit ratios by dividing insurance policy benefits by insurance policy income. Bankers Life § 3Q10 impacted by favorable claims experience
Slide 63: Interest-Adjusted Benefit Ratio - LTC
Interest-Adjusted Benefit Ratio* - LTC *We calculate interest-adjusted benefit ratios by dividing insurance policy benefits less interest income on the accumulated assets backing the insurance liabilities by insurance policy income. Trailing 4 Quarter Avg.: 68.2% 67.9% 69.6% 71.0% 71.7% Qtrly. non-i
Slide 64: Segment Performance: Washington National
Segment Performance Washington National *Operating earnings exclude net realized gains (losses). See Appendix for corresponding GAAP measure of our consolidated results of operations. PTOI-Trailing 4 Quarters: $133.7 $110.9 $104.9 $100.8 $98.9 Revenues-Quarterly: $198.2 $191.3 $191.1 $190.8 $191.6 P
Slide 65: Premiums - Med Supp
Premiums - Med Supp ($ millions) First-Year Prems.-Tr. 4 Qtrs: $8.0 $7.2 $6.9 $6.1 $4.6 Total Premiums-Quarterly: $46.9 $43.7 $40.7 $38.7 $37.9 Med Supp - First-Year Premiums NAP-Quarterly: $1.3 $1.5 $1.1 $0.7 $0.4 NAP-Trailing 4 Quarters: $7.8 $5.8 $5.2 $4.6 $3.7 § First-year collections down 68% –
Slide 66: Premiums - Supplemental Health
Premiums - Supplemental Health Washington National ($ millions) First-Year Prems.-Tr. 4 Qtrs: $43.6 $45.4 $47.7 $49.7 $50.9 Total Premiums-Quarterly: $96.2 $99.0 $99.6 $100.2 $101.5 Supplemental Health - First-Year Premiums NAP-Quarterly: $16.1 $15.2 $14.6 $17.5 $18.0 NAP-Trailing 4 Quarters: $54.3
Slide 67: Interest-Adjusted Benefit Ratio - Supplemental Health Insurance
Interest-Adjusted Benefit Ratio* - Supplemental Health Insurance Trailing 4 Quarter Avg.: 41.2% 46.0% 47.8% 48.4% 50.3% Qtrly. non-int. adjusted: 76.6% 82.0% 82.3% 83.2% 81.3% *We calculate interest-adjusted benefit ratios by dividing insurance policy benefits, less interest income on the accumulate
Slide 68: Segment Performance: Colonial Penn
Segment Performance Colonial Penn *Operating earnings exclude net realized gains (losses). See Appendix for corresponding GAAP measure of our consolidated results of operations. PTOI-Trailing 4 Quarters: $30.2 $29.4 $29.6 $26.2 $26.6 Revenues-Quarterly: $58.1 $57.8 $58.1 $59.1 $58.9 Pre-Tax Operatin
Slide 69: Premiums - Life Insurance
Premiums - Life Insurance Colonial Penn ($ millions) First-Year Prems.-Tr. 4 Qtrs: $34.4 $33.0 $31.7 $31.4 $31.6 Total Premiums-Quarterly: $45.6 $48.9 $47.3 $46.7 $46.9 Life - First-Year Premiums NAP-Quarterly: $10.6 $8.4 $13.1 $12.2 $11.5 NAP-Trailing 4 Quarters: $44.3 $41.9 $42.7 $44.3 $45.2 § Sal
Slide 70: Segment Performance: Other CNO Business
Segment Performance Other CNO Business *Operating earnings exclude net realized gains (losses). See Appendix for corresponding GAAP measure of our consolidated results of operations. PTOI-Trailing 4 Quarters: $(28.2) $(43.6) $(43.1) $(30.3) $(47.2) Revenues-Quarterly: $183.0 $166.4 $167.4 $153.6 $17
Slide 71: 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 72: Net Income to Net Operating Income Reconciliation
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 73: Book Value, Excluding AOCI, Per Share
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 to determine the measure. Management believes this non-GAA
Slide 74: Operating Return Measures
Operating return measures Management believes that an analysis of return before loss on extinguishment or modification of debt, net realized gains or losses, and increases to our valuation allowance for deferred tax assets (“net operating income,” a non-GAAP financial measure) is important to evalua
Slide 75: Operating Return on Allocated Capital and Return on Equity Calculations
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 ended September 30, 2010, are as follows (dollars in millions)
Slide 76: Pretax Operating Earnings to Segment Operating Return Reconciliation
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 September 30, 2010, is as follows (dollars in millions): (Continued on next page) Information Related to Certain Non-GAAP Fin
Slide 77: Average Allocated Capital Reconciliation
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 average common shareholders’ equity, is as follows (dollars in mi
Slide 78: Consolidated Capital Reconciliation
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): (Continued from previous page) Information Related to Certain No
Slide 79: Debt to Capital Ratio Reconciliation
A reconciliation of the debt to capital ratio to debt to capital, excluding accumulated other comprehensive income (loss) is as follows (dollars in millions): Debt to capital ratio, excluding accumulated other comprehensive income (loss) This non-GAAP financial measure differs from the debt to capit