Cno Financial Group, Inc. · NYSE:CNO
Cno Financial — Q2 2011 Earnings Presentation
70 slides from Cno Financial's earnings presentation, Jul 28, 2011
Slide 1: 2Q11 Financial and operating results
2Q11 Financial and operating results for the period ended June 30, 2011 July 28, 2011 Unless otherwise specified, comparisons in this presentation are between 2Q11 and 2Q10. 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: 2Q11: Summary
2Q11: Summary CNO § Net income of $59.5 million, compared to $33.1 million § Net operating income* up 28% to $57.5 million, or 20 cents per diluted share § Consolidated RBC at 351%, up 10 percentage points from 3/31/11 – Statutory earnings of $78.7 million were offset by $78 million of dividend paym
Slide 6: 2Q11 Summary of Results
2Q11 Summary of Results CNO ($ 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, fair value changes due to fluctuations in the interest rates used to discount embedded derivative liabilities related to our fix
Slide 8: Operating ROE
Average common shareholders’ equity, excluding AOCI/L and net operating loss carryforwards, trailing 4 quarters: $2,808.3 $2,942.8 $3,048.5 $3,129.7 $3,217.4 Operating ROE CNO Operating ROE*, Trailing 4 Quarters *Operating return excludes loss on extinguishment of debt, net realized investment gains
Slide 9: Operating EPS (Diluted)
Weighted average diluted shares (in millions)**: 302.6 306.0 306.7 307.5 308.0 Operating EPS* (Diluted) § Increased EPS due to higher earnings * Operating earnings per share exclude loss on extinguishment of debt, net realized investment gains (losses), fair value changes due to fluctuations in the
Slide 10: Book Value
Book Value CNO *See Appendix for a reconciliation to the corresponding GAAP measure. ($ millions, except per-share amounts) Book value per diluted share (excluding AOCI/L) as of June 30, 2011 was $14.58
Slide 11: Pre/After Tax GAAP Operating Income
ee Pre/After Tax GAAP Operating Income CNO ($ millions) $350.0 $321.7 $300.0 $281.6 $252.3 $250.0 $200.0 $150.0 $100.0 $50.0 $0.0 2009 2010 LTMas of 6/30/2011 Net Operating Income Tax Expense on Operating Income
Slide 12: Statutory Earnings Power
Statutory Earnings Power CNO ($ millions) $600.0 500.2 $500.0 : $406.6 $411.6 $400.0 $300.0 genni $364.6 $269.5 $279.2 $100.0 $0.0 2009 2010 LTMas of 6/30/2011 Pre-Tax Operating Income mw Fees and Interest to Holding Company
Slide 13: Financial Strength
21.3% 21.2% 20.0% 19.2% 18.7% Debt to Total Capital Ratio** Financial Strength § RBC increased to 351% in 2Q11 – Positive impact reflects increase from Statutory income (+20 pts) and reduction in NAIC 5 and 6 securities (+7 pts) – Partially offset by dividends paid up to the holding company (-17 pts
Slide 14: Bankers Life 2Q Summary
§ Earnings of $84.7 million, up 32% – Results in 2Q11 were favorably impacted by: • Increase in annuity income due to growth in the block, reflecting continued favorable persistency • Bond prepayment income • Additional spread earned on investments purchased with the proceeds of borrowings from the
Slide 15: Bankers Life Sales and Distribution Results
Med supp policies issued (in thousands): 12.6 10.2 19.7 11.4 11.8 Sales and Distribution Results § Mixed sales results – Down 6%; up 9% vs. 1Q11 • Life sales up 8%; up 12% vs. 1Q11 • Annuity sales down 8%; up 16% vs. 1Q11 • Med supp sales down 11%; up 2% vs. 1Q11 • LTC sales down 17%; up 6% vs. 1Q11
Slide 16: Medicare Supplement Update
Medicare Supplement Update Bankers Life § Industry and Competition – Competitors continue to take rate increases in most markets – Bankers plans to take no pricing actions this year, as product is performing to profit expectations – Began filing more competitive four-tier structure, offering gender-
Slide 17: Bankers Life LTC Update
Bankers Life § Stable financial results – Interest adjusted benefit ratio over the past several quarters in the 70- 75% range, reflecting ongoing claims management improvements and successfully gaining approval for rate increases where necessary § Rate increase activity continues – Filed for increas
Slide 18: Bankers Life Quarterly Earnings
Quarterly Earnings Management believes that an analysis of income before: (i) net realized investment gains (losses), net of related amortization; and (ii) fair value changes due to fluctuations in the interest rates used to discount embedded derivative liabilities related to our fixed index annuiti
Slide 19: Washington National 2Q Summary
2Q Summary Washington National § Earnings of $22.7 million, up 8%, consistent with our expectations § Core product sales (supplemental health and life) up 3% – Up 14% from 1Q11 § Solid recruiting results for the PMA and WNIC Independent channels
Slide 20: Washington National Sales Results
Washington National 2Q10 NAP 2Q11 NAP 2Q11 Sales Results ($ millions) § Supplemental health sales up 2% § Up 14% vs. 1Q11 § Life sales up 23% § Up 15% vs. 1Q11
Slide 21: Ongoing Growth Initiatives
Ongoing Growth Initiatives Washington National § PMA – Increasing agent recruiting capacity – Training agents to cross-sell life insurance with their supplemental health sales – Developing more sales leaders to support larger agent force and geographic expansion § WNIC Independent – Increasing IMO r
Slide 22: 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 i
Slide 23: Colonial Penn 2Q Summary
§ Earnings of $7.6 million, flat compared to 2Q10 § Sales growth continues, NAP up 5% – Down 6% from 1Q11 2Q Summary Colonial Penn
Slide 24: 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 25: Plans to Invest in Organic Growth
§ New COO role will focus on optimizing growth initiatives across the segments and achieving operational efficiencies to support that growth § Currently evaluating initiatives in each segment for 2012 that will generate additional growth with returns at or above our new business target of 12% § Orga
Slide 26: Other CNO Business 2Q Summary
§ Earnings of $4.8 million, compared to $8.8 million – Results in this block are expected to fluctuate from period to period and the results in 2Q11 were within our range of expectations 2Q Summary Other CNO Business
Slide 27: Quarterly Earnings (Losses)
Quarterly Earnings (Losses) Other CNO Business ($ millions) Management believes that an analysis of income before: (i) net realized investment gains (losses), net of related amortization; and (ii) fair value changes due to fluctuations in the interest rates used to discount embedded derivative liabi
Slide 28: Excess Capital
Excess Capital Consolidated RBC Ratio Liquidity ($ millions) Approximately $243 million in excess of management target $134 million in excess of management target Management Target = 300% Management Target = $100 Approximately $377 million total excess capital as of 6/30/11 CNO
Slide 29: Excess Capital Utilization Opportunities
Excess Capital Utilization Opportunities § Debt Prepayment § Share Buybacks § Investing in Business for Additional Growth – Growth and expansion of distribution channels – Recapture reinsurance blocks § Build Holding Company Investment Portfolio – Utilize non-life operating loss carryforward CNO
Slide 30: 2Q11 Share Repurchase & Debt Prepayment
2Q11 Share Repurchase & Debt Prepayment § Purchased 2.2 million shares during 2Q 2011 for $16.2 million § Average cost per share of $7.35 § 0.9% of outstanding shares at March 31, 2011 § Principal prepayment of $16.2 million made on Senior Secured Credit Facility on June 30, 2011 – Payment reduced s
Slide 31: Net Loss Carryforwards
Net Loss Carryforwards GAAP Balances for Deferred Tax Asset as of 6/30/11: Loss Carryforwards - Gross 1 vs. Net 2 ($ 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 32: Net Investment Income
Earned Yield: 5.83% 5.86% 5.77% 5.79% 5.87% Earned Yield (excluding floating rate FHLB): 5.83% 5.87% 5.84% 5.90% 5.97% New Money Rate (excluding floating rate FHLB): 6.26% 6.00% 5.96% 5.60% 5.24% Net Investment Income CNO § Relatively stable yield progression despite tight investment environment § I
Slide 33: Realized Gains/Losses Recognized through Net Income
Realized Gains/Losses Recognized through Net Income CNO ($ millions)
Slide 34: *Includes debt and equity securities classified as available for sale. Excludes investments from variable
*Includes debt and equity securities classified as available for sale. Excludes investments from variable interest entities which we consolidate under GAAP.
Slide 35: 2Q11 Impairments
2Q11 Impairments CNO ($ millions)
Slide 36: Commercial Mortgage Loans at 6/30/11
Commercial Mortgage Loans at 6/30/11 By Vintage CNO By Property Type § Average trailing debt service coverage ratio (DSCR) stable at approximately 1.41 § As of 6/30/11, 2 delinquent loans ($11.6mm unpaid balance)
Slide 37: Asset Allocation at 6/30/11
Asset Allocation at 6/30/11* CNO *Excludes investments from variable interest entities which we consolidate under GAAP (the related liabilities are non-recourse to CNO). ($ millions)
Slide 38: Investment Quality: Fixed Maturities
% of Bonds which are Investment Grade: 92% 92% 91% 90% 92% Investment Quality: Fixed Maturities* CNO § 92% investment grade *Excludes investments from variable interest entities which we consolidate under GAAP (the related liabilities are non-recourse to CNO).
Slide 39: Holding Company Investments at 6/30/11
Cash and Money Market $130.9 Fixed Income (net) 17.6 Equities 12.9 Alternatives* 72.6 TOTAL $234.0 Holding Company Investments at 6/30/11 CNO ($ millions) Target Allocation Current Investments * Includes $25 Paulson investment made 7/1/2011; excluded from cash and money market
Slide 40: European Debt by Select Countries
European Debt by Select Countries CNO ($ millions)
Slide 41: Summary
Summary § Core business continues to perform well – Solid earnings continued in 2Q – Key measures of financial strength continue to improve § CEO transition and new COO role § Capital generation creates unique opportunities – Generating significant amounts of excess capital – Moving more excess capi
Slide 42: Questions and Answers
Questions and Answers
Slide 43: Appendix
Appendix
Slide 44: 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 $1,200 CNO 225% Covenants levels per agreement 2.0x ** ** **
Slide 45: 2Q11 Holding Company Liquidity
2Q11 Holding Company Liquidity CNO ($ millions)
Slide 46: 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 $7.69 for 20 or more days in a consecutive 30 day trading period. On 6/30/
Slide 47: Operating Return on Allocated Capital Computation
Operating Return on Allocated Capital Computation* Adjusted operating earnings for the purpose of calculating operating return on allocated capital is determined as follows: Allocated capital is calculated as follows: * A non-GAAP financial measure. Refer to the Appendix for a reconciliation to the
Slide 48: Alt-A at 6/30/11
Alt-A at 6/30/11 CNO § 1.3% of total invested assets § 98% NAIC 1 classification § Collateral performing better than overall Alt-A collateral universe in terms of delinquency and accumulated loss trends § All securities evaluated using market-consistent estimates of future collateral performance § S
Slide 49: Prime Jumbo at 6/30/11
Prime Jumbo at 6/30/11 CNO § 4.0% of total invested assets § 99.2% NAIC 1 classification § Substantial proportion of investments purchased at discounts reflective of current market expectations for cash flows from collateral § All securities evaluated using market-consistent estimates of collateral
Slide 50: CMBS at 6/30/11
CMBS at 6/30/11 CNO ($ millions)
Slide 51: CMBS at 6/30/11
CMBS at 6/30/11 CNO § 6.0% of invested assets § 99.5% 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 52: Commercial Mortgage Loans at 6/30/11
Commercial Mortgage Loans at 6/30/11 CNO Pacific 10.8% Mountain 10.1% West North Central 13.7% West South Central 6.2% East North Central 15.5% East South Central 3.1% New England 8.4% Middle Atlantic 8.3% South Atlantic 23.9%
Slide 53: Commercial Mortgage Loans at 6/30/11
Commercial Mortgage Loans at 6/30/11 Remaining Principal Balance By Maturity CNO ($ millions)
Slide 54: Premiums Collected
Premiums Collected CNO § Trailing 4 quarters down 6% – 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 2Q10 $3,819
Slide 55: Premiums Collected - Med Supp
PFFS policies issued: -0.4 0.1 0.4 9.7 1.7 PDP policies issued: 0.3 1.0 0.4 8.1 7.5 Med Supp First-Year Prems.-Tr. 4 Qtrs: $107.5 $114.1 $116.4 $114.3 $109.6 Med Supp Total Premiums-Quarterly: $168.8 $170.1 $182.3 $178.8 $169.0 Med Supp NAP-Quarterly: $21.0 $16.0 $31.8 $18.3 $18.6 Med Supp NAP-Trail
Slide 56: Premiums Collected - LTC
Premiums Collected - LTC § Net first-year premiums up 9%, reflecting reduction in new business reinsurance First-Year Prems.-Tr. 4 Qtrs: $19.1 $21.9 $22.2 $23.5 $24.0 Total Premiums-Quarterly: $146.6 $145.0 $143.5 $144.9 $142.9 Long-Term Care - First-Year Premiums* NAP-Quarterly: $8.7 $7.2 $6.7 $6.9
Slide 57: Premiums Collected - Life
$12.4 $15.1 Premiums Collected - Life § First-year premiums up 19% First-Year Prems.-Tr. 4 Qtrs: $91.4 $93.8 $97.7 $102.2 $106.8 Total Premiums-Quarterly: $52.1 $54.8 $56.2 $56.4 $62.0 Life - First-Year Premiums NAP-Quarterly: $17.3 $16.3 $15.9 $16.6 $18.6 NAP-Trailing 4 Quarters: $62.6 $63.1 $65.3
Slide 58: Premiums Collected - Annuity
Premiums Collected - Annuity § First-year premiums down 8% First-Year Prems.-Tr. 4 Qtrs: $984.4 $965.1 $1,001.2 $999.4 $977.4 Total Premiums-Quarterly: $281.1 $265.8 $234.4 $222.2 $259.1 Annuity - First-Year Premiums Bankers Life ($ millions)
Slide 59: Premiums Collected - Supplemental Health
Premiums Collected - Supplemental Health Washington National § First-year premiums up 5% First-Year Prems.-Tr. 4 Qtrs: $49.7 $50.9 $52.0 $52.7 $53.3 Total Premiums-Quarterly: $100.2 $101.5 $104.2 $106.5 $108.5 Supplemental Health - First-Year Premiums NAP-Quarterly: $17.5 $18.0 $17.5 $15.7 $17.9 NAP
Slide 60: Premiums Collected - Life
Premiums Collected - Life Colonial Penn § First-year premiums up 6% First-Year Prems.-Tr. 4 Qtrs: $31.4 $31.6 $32.3 $33.1 $33.6 Total Premiums-Quarterly: $46.7 $46.9 $46.8 $49.4 $48.5 Life - First-Year Premiums NAP-Quarterly: $12.2 $11.5 $9.5 $13.6 $12.8 NAP-Trailing 4 Quarters: $44.3 $45.2 $46.3 $4
Slide 61: 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 62: 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 63: 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): Information Related to Certain Non-GAAP Financial Measures
Slide 64: 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 65: 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 66: 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 67: 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 June 30, 2011, is as follows (dollars in millions): (Continued on
Slide 68: 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 69: 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 70: 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