CNO Financial Group, Inc. · NYSE:CNO
CNO Financial — Conseco — Q3 2006 Earnings Presentation
52 slides from CNO Financial's earnings presentation, Sep 30, 2006
Slide 1: Third Quarter 2006 Financial and Operating Results
Third Quarter 2006 Financial and Operating Results For the period ended September 30, 2006 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 this press release relative to markets for Conseco’s products and trends in Conseco’s operations or financial results, as well as other statements,
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 diluted share; operating r
Slide 4: Financial Highlights
Financial Highlights CNO A disappointing quarter, with poor experience in the Runoff LTC book of business dragging down results Earnings from Bankers Life were strong, with steady growth in sales at both Bankers Life and Colonial Penn Earnings from Conseco Insurance Group (CIG) were down, whil
Slide 5: Business Highlights
Business Highlights CNO Q4 2005 Q2 2006 Q3 2006 $91.6 New business volumes* $89.7 Q1 2006 $89.1 Q3 2005 $85.8 $80.0 (NAP – in millions) A.M. Best ratings confirmed, long-term targets for metrics for an upgrade laid out New talent joining the firm – new health actuaries, claims and LTC speciali
Slide 6: Collected Premium Growth
Collected Premium Growth CNO ($ millions) $1,156.5 $80.4 Run-Off Growth in all of our core $972.0 businesses $87.1 $406.6 CIG Consolidated premiums up $289.5 $185 million, or 19% from Q3 2005 $669.5 $595.4 Bankers Q3 2005 Q3 2006 6
Slide 7: Operating EPS (Diluted)
Operating EPS (Diluted) CNO Operating EPS* Operating EPS, Before Q2 2006 Charge** Q3 2005 Q4 2005 Q2 2006 Q3 2005 Q4 2005 $0.44 $0.44 Q1 2006 Q3 2006 $0.45 $0.44 $0.44 Q1 2006 $0.36 Q3 2006 $0.35 $0.36 $0.35 Q2 2006 ($0.21) *Operating earnings per share exclude net realized **Operating earnings per
Slide 8: Operating ROE
Operating ROE CNO Operating ROE*, Trailing 4 Quarters Operating ROE (excl. Q2 2006 charge and NOLs)**, Trailing 4 Quarters Q3 2005 Q4 2005 11.6% 11.5% Q1 2006 Q2 2006 Q3 2005 Q4 2005 10.6% 10.2% Q3 2006 9.6% 9.2% Q1 2006 9.2% 8.2% Q2 2006 4.7% Q3 2006 3.8% *Operating return excludes net realized **O
Slide 9: Q3 Earnings
Q3 Earnings CNO ($ millions) Q3 2005 Q3 2006 Bankers Life $60.4 $73.0 Conseco Insurance Group 67.1 58.5 Other Business in Run-Off 16.4 (13.0) Corporate operations, excluding interest expense (1.1) (8.1) Total EBIT* 142.8 110.4 Corporate interest expense and loss on extinguishment of debt (15.8) (12.
Slide 10: Book Value Per Diluted Share
Book Value Per Diluted Share* CNO Q2 2006 Q3 2006 Reflects dilution as if our Q4 2005 Q1 2006 $24.56 $25.84 $25.81 $24.26 preferred stock had converted Q3 2005 $20.46 Slight decrease to $25.81 in Q3 2006 reflects increase in diluted shares, partially offset by earnings *Book value excludes accum
Slide 11: Debt to Total Capital Ratio
Debt to Total Capital Ratio* CNO Ratio will increase in Q4 2006 Q3 2005 Q4 2005 Q3 2006 17% (Pro Forma) for the refinancing we 16% Q1 2006 Q2 2006 17% 15% 15% Q3 2006 completed in October 14% *Excludes accumulated other comprehensive income (loss). See Appendix for corresponding GAAP measure. Q3 2
Slide 12: Consolidated RBC Ratio
Consolidated RBC Ratio* CNO RBC ratios remain strong in Q3 Q4 2005 Pro Forma Q3 2006 Q3 2005 Q1 2006 2006 349% 358% 348% Q2 2006 Q3 2006 370% 331% 323% Contributions of the proceeds from October refinancing will increase ratio in Q4 2006 *Risk-Based Capital (“RBC”) requirements provide a tool fo
Slide 13: Net Investment Income
Net Investment Income CNO ($ millions) General Account Investment Income, Excluding Corporate Segment Yields have improved in 2006 Q3 2005 Q2 2006 Q3 2006 Q4 2005 Q1 2006 $356.5 $359.5 Q3 2005 yield reflects significant $355.2 $347.8 $350.3 prepayment income, adding approximately 23 basis points
Slide 14: High-Quality Assets
High-Quality Assets CNO Actively Managed Fixed Maturities by Rating at 9/30/06 (Market Value) Portfolio quality remains high BB+ Less than 5% of portfolio is and below 5% BBB- below investment grade 6% BBB AAA 12% 35% BBB+ 11% AA 7% A 24% Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 % of Bonds which
Slide 15: Aggregate Health Benefit Ratio
Aggregate Health Benefit Ratio* CNO Aggregate Health Benefit Ratio – By Quarter Loss ratios in our core Core (BLC & CIG) Business businesses remain stable Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 77.3% 78.0% 78.4% 77.2% 78.2% Disappointing results in non- core long-term care run-off block caused
Slide 16: Expenses
Expenses CNO ($ millions) Gross Operating Expenses*, Trailing 4 Quarters Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 $613.0 $584.4 $576.4 $570.3 $573.5 *Gross operating expenses before capitalization of cost of policies produced, capitalization of software development costs and other adjustments. Costs
Slide 17: Segment Performance CIG
Segment Performance CIG ($ millions) Pre-Tax Operating Income* Continued emphasis on building Q3 2005 $67.1 Q2 2006 $64.7 Q4 2005 out distribution to offset the $59.1 Q3 2006 $58.5 normal erosion of the large inforce block Q1 2006 $41.9 PTOI-Trailing 4 Quarters: $258.6 $256.7 $234.2 $232.8 $224.2
Slide 18: Benefit Ratio – Medicare Supplement CIG
Benefit Ratio* – Medicare Supplement CIG Benefit ratios in 2005 and first half Q3 2005 Q1 2006 Q3 2006 66.8% Q4 2005 of 2006 benefited from release of 60.9% 58.6% 60.3% Q2 2006 56.9% policy benefit reserves related to increase in policyholder lapses Persistency improved in Q3 2006; we expected t
Slide 19: Interest-Adjusted Benefit Ratio – Specified Disease CIG
Interest-Adjusted Benefit Ratio* – Specified Disease CIG Benefit ratio in Q4 2005 and first Q4 2005 Q1 2006 Q2 2006 Q3 2005 48.1% 48.2% half of 2006 reflected higher than 44.5% 45.9% Q3 2006 expected incurred claims, driven 41.2% primarily by continued incidence of paid claims with old initial inc
Slide 20: Premiums - Medicare Supplement CIG
Premiums - Medicare Supplement CIG ($ millions) Medicare Supplement – First-Year Premiums Q1 2006 59% increase in first-year $8.3 Q2 2006 $7.9 premiums over Q3 2005 Q3 2006 $6.5 NAP for 2006 to date well ahead Q4 2005 $5.3 of last year Q3 2005 $4.1 First-Year Prems.-Tr. 4 Qtrs: $14.1 $15.8 $21.0
Slide 21: Premiums – Specified Disease CIG
Premiums – Specified Disease CIG ($ millions) Specified Disease – First-Year Premiums Q4 2005 Successful recruiting results at Q3 2005 $7.2 $7.4 Q1 2006 $7.2 Q2 2006 Q3 2006 $7.0 PMA (wholly owned distribution $6.8 subsidiary) First-Year Prems.-Tr. 4 Qtrs: $31.1 $30.6 $29.7 $28.8 $28.4 Total Premi
Slide 22: Premiums – Life Insurance CIG
Premiums – Life Insurance CIG ($ millions) Life – First-Year Premiums Line being revitalized • New channel leader hired in May Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 $1.7 $1.6 $1.7 $1.7 $1.7 • Three field VPs added YTD improvements in: • IMO appointments (267%) • Submitted apps (6%) • Submitted
Slide 23: Premiums – Annuity CIG
Premiums – Annuity CIG ($ millions) Annuity – First-Year Premiums Q3 2006 Continued rapid growth $178.8 • Traditional IMO channel strong • Significant contribution from Legacy Marketing Group relationship Q2 2006 $87.0 • Actuarial Development Services Q4 2005 $60.7 partnership launches first produ
Slide 24: Segment Summary CIG
Segment Summary CIG Continued focus on: • Hiring the right people • Working with distribution to develop the right products • Building out Worksite • Improving our execution 24
Slide 25: Segment Performance Bankers
Segment Performance Bankers ($ millions) Pre-Tax Operating Income* Q3 2006 Q3 2005-Q3 2006 earnings Q2 2006 Q4 2005 $73.0 $70.2 $66.8 Q1 2006 improvement driven by: Q3 2005 $60.4 $62.3 • Improving Medicare Supplement benefit ratio • Higher investment income • Lower operating expenses PTOI-Trailing
Slide 26: Benefit Ratio – Medicare Supplement Bankers
Benefit Ratio* – Medicare Supplement Bankers Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Improving benefit ratio reflects: 71.8% 70.2% 67.8% 67.4% 65.7% • Pricing action taken earlier this year • Claim redundancies for 2005 and prior incurred claims • Improving loss ratio estimate for 2006 incurred cl
Slide 27: Interest-Adjusted Benefit Ratio – Long Term Care Bankers
Interest-Adjusted Benefit Ratio* – Long Term Care Bankers Q4 2005 Q2 2006 Q3 2006 Q1 2006 Q3 2005 68.8% 67.0% 66.9% 66.8% 65.1% Interest-adjusted benefit ratio relatively flat for past several quarters Increase in Q3 2006 ratio reflects: • Higher incurred claims Trailing 4 Quarter Avg.: 63.9% 65
Slide 28: Segment Summary Bankers
Segment Summary Bankers Improving fundamentals in the business • Lower Medicare Supplement benefit ratio • Strong execution of LTC inforce re-rate actions First-year collected premium • Q3 2006 - $364 million, up 26% over Q3 2005 • YTD 2006 - $1,004 million, up 17% over YTD 2005 28
Slide 29: Premiums – Medicare Supplement/PDP Bankers
Premiums – Medicare Supplement/PDP Bankers ($ millions) Medicare Supplement – First-Year Premiums Strong sales Q1 2006 Q2 2006 • First-year premiums up 27% from $24.8 $24.5 Q3 2006 Q4 2005 $23.2 Q3 2005 $20.6 Q3 2005 • Trailing 4 Qtrs premiums up 30% $18.2 from Q3 2005 Med. Supp. First-Year Prems.
Slide 30: Premiums – Long-Term Care Bankers
Premiums – Long-Term Care Bankers ($ millions) Long-Term Care – First-Year Premiums Steady decline in premiums over Q3 2005 $15.9 Q4 2005 $15.3 the past five quarters Q1 2006 $14.2 Q2 2006 $13.1 Q3 2006 New sales are meeting our $12.0 pricing objectives First-Year Prems.-Tr. 4 Qtrs: $66.8 $65.4
Slide 31: Premiums – Life Insurance Bankers
Premiums – Life Insurance Bankers ($ millions) Life – First-Year Premiums Growth driven by: Q3 2006 Q2 2006 $24.4 Q3 2005 • Continued focus on new agent $22.4 Q4 2005 $22.0 Q1 2006 $23.3 training $20.7 • Expanded advanced life insurance training for veteran agents • All product lines up: Universal
Slide 32: Premiums – Annuity Bankers
Premiums – Annuity Bankers ($ millions) Annuity – First-Year Premiums Q3 2006 Q4 2005 $277.3 Growth driven principally by: $263.6 Q2 2006 Q3 2005 Q1 2006 $237.3 • Increased sales of equity-indexed $226.7 $232.5 annuities First-Year Prems.-Tr. 4 Qtrs: $972.8 $948.3 $960.5 $960.1 $1,010.7 Total Prem
Slide 33: Premiums – Life Insurance Colonial Penn
Premiums – Life Insurance Colonial Penn ($ millions) Life – First-Year Premiums Growth driven by: Q1 2006 Q2 2006 $5.7 Q3 2006 $5.8 $5.5 Q3 2005 Q4 2005 • Increased but focused ad spend $5.0 $5.0 • Expanding breadth of lead sources • Improving direct mail productivity • Improving telemarketing pro
Slide 34: Interest-Adjusted Benefit Ratio – LTC Closed Block Run-Off Block
Interest-Adjusted Benefit Ratio* – LTC Closed Block Run-Off Block Ratio has risen for the past two Q3 2006 quarters 83.1% Persistency exceeded Q2 2006 64.4% expectation in Q3 Q3 2005 Q4 2005 50.5% 49.4% Q1 2006 Inventory-adjusted paid claims 45.1% exceeded historical average in Q2 and Q3 Inv
Slide 35: Program for Improvement Run-Off Block
Program for Improvement Run-Off Block Progress continues on second quarter initiatives • Premium re-rates • Talent and organizational design • Technology • Claims management 35
Slide 36: Program for Improvement Run-Off Block: Premium re-rates
Program for Improvement Run-Off Block Premium re-rates • 357 rate filings are involved, seeking three successive years of rate increase • Expected annualized Net Revenue Enhancement (NRE) estimated at $35 million from the first round of rate increases • $8 million approved to date (22%); targeting
Slide 37: Program for Improvement Run-Off Block: Talent
Program for Improvement Run-Off Block Talent and organizational design • Three significant additions to leadership in last quarter Dick Garner – product management – 20+ years of LTC experience Brian Wegner – operations management – 7 years of LTC experience David Vega – claims management –
Slide 38: Program for Improvement Run-Off Block: Technology
Program for Improvement Run-Off Block Technology • Workflow system on line this month • Improved policy/benefit repository (2007) 38
Slide 39: Program for Improvement Run-Off Block: Claims management
Program for Improvement Run-Off Block Claims management • Hired LifePlans for claims leakage study • Hired major actuarial firm for claims review and other improvements 39
Slide 40: Segment Summary Run-Off Block
Segment Summary Run-Off Block Summary • Progress is being made, but will take time to be reflected in results • 2007 will be transformational year 40
Slide 41: Observations – First 50 Days
Observations – First 50 Days CNO Distribution – a real strength • Bankers Life – a very solid franchise • CIG – making good inroads with IMOs, making its presence felt • Colonial Penn – great direct marketing platform • Distribution systems not particularly rating-sensitive 41
Slide 42: CNO Summary
CNO Summary Positive developments: • Good profitability at Bankers • Solid sales at CIG Poor results in Run-Off LTC • Working aggressively to improve performance Conseco remains committed to growth • Focused on attractive middle market • Unique sales machine 42
Slide 43: Questions and Answers
S CONSECO. Questions and Answers 43
Slide 44: Appendix: Information Related to Certain Non-GAAP Financial Measures
Appendix: Information Related to Certain Non-GAAP Financial Measures The following provides additional information regarding certain non-GAAP measures used in this presentation. While management believes these measures are useful to enhance understanding and comparability of our financial results, t
Slide 45: Appendix: Information Related to Certain Non-GAAP Financial Measures
Appendix: Information Related to Certain Non-GAAP Financial Measures A reconciliation of net income applicable to common stock to the net operating income, excluding Q2 2006 charge related to tentative litigation settlement (and related per share amounts) is as follows (dollars in millions, except p
Slide 46: Appendix: Information Related to Certain Non-GAAP Financial Measures
Appendix: Information Related to Certain Non-GAAP Financial Measures Book value, excluding accumulated other comprehensive income, per diluted share This non-GAAP financial measure differs from book value per diluted share because accumulated other comprehensive income has been excluded from the boo
Slide 47: Appendix: Information Related to Certain Non-GAAP Financial Measures
Appendix: Information Related to Certain Non-GAAP Financial Measures A reconciliation from book value per diluted share to book value per diluted share, excluding accumulated other comprehensive income (loss) is as follows (dollars in millions, except per share amounts): Q3 05 Q4 05 Q1 06 Q2 06 Q3 0
Slide 48: Appendix: Information Related to Certain Non-GAAP Financial Measures
Appendix: Information Related to Certain Non-GAAP Financial Measures Operating return measures Management believes that an analysis of return before net realized gains or losses (“net operating income”, a non-GAAP financial measure) is important to evaluate the performance of the Company and is a ke
Slide 49: Appendix: Information Related to Certain Non-GAAP Financial Measures
Appendix: Information Related to Certain Non-GAAP Financial Measures A reconciliation of return on common equity to operating return (less Q2 2006 charge related to the tentative litigation settlement) on common equity (excluding accumulated other comprehensive income (loss) and net operating loss c
Slide 50: Appendix: Information Related to Certain Non-GAAP Financial Measures
Appendix: Information Related to Certain Non-GAAP Financial Measures (continued from previous page) Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Average common shareholders' equity 3,406.6 3,569.2 3,733.8 3,622.2 3,836.9 Average common shareholder's equity, excluding accumulated other comprehensive income (loss) (
Slide 51: Appendix: Information Related to Certain Non-GAAP Financial Measures
Appendix: 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 has been excluded from the value o
Slide 52: Appendix: Information Related to Certain Non-GAAP Financial Measures
Appendix: Information Related to Certain Non-GAAP Financial Measures A reconciliation of the debt to capital ratio to debt to capital, excluding accumulated other comprehensive income (loss), is as follows (dollars in millions): Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Corporate notes payable $ 772.7 $ 851.5 $