Cno Financial Group, Inc. · NYSE:CNO
Cno Financial — Q2 2012 Earnings Presentation
60 slides from Cno Financial's earnings presentation, Jul 26, 2012
Slide 1: 2Q12 Financial and operating results
2Q12 Financial and operating results for the period ended June 30, 2012 July 26, 2012 Unless otherwise specified, comparisons in this presentation are between 2Q12 and 2Q11.
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: Adoption of New Accounting Standard
Adoption p of New Accounting g Standard Effective January 1, 2012, we adopted ASU 2010-26 which modified the definition of the types of acquisition costs that can be deferred by insurance companies. We elected to adopt the new guidance on a retrospective basis. Accordingly, all prior periods present
Slide 5: CNO Financial Group
CNO Financial Group 5
Slide 6: Summary
Summary CNO Our businesses continue to perform well – Operating p g earnings g up p 22% – Sales growth of 6% over 2Q11 Continue to generate and proactively deploy significant amounts of excess capital – Strong statutory earnings – Increased share buyback program – Initiated common stock dividend
Slide 7: Operating EPS
Operating EPS CNO E l di Significant Excluding Si ifi Items* I * (Diluted) (Dil d) Earnings Excluding Significant Items* 2Q12 Earnings Drivers: $0.19 $0 19 Business growth and retention 2Q11 $0.15 In-force margin improvement Proactive capital deployment Weighted average diluted shares (in mill
Slide 8: Operating ROE
Operating ROE CNO ($ millions) Trailing g4qquarters earnings g up p 6% Operating ROE*, ROE , Trailing 4 Quarters Average common shareholders’ equity up 10% 2Q11 3Q11 4Q11 2Q12 1Q12 Levers to improve ROE 6.3% 6.0% 6.1% 5.8% 6.0% – Layering aye g o on new e bus business ess with 12+%%a after-tax
Slide 9: Growth in the CNO Franchise
Growth ($ millions) in the CNO Franchise CNO Average liabilities on core business segments are increasing, while OCB is shrinking $16,514.1 $16,106.8 $15,481.7 $711 7 $711.7 $704.0 $698.0 $2,624.0 $2,637.6 $2,676.8 $12,765.2 $13,178.4 $12,106.9 $5,511.5 $5,286.1 $5,058.5 2010 2011 2Q12 CNO Financial
Slide 10: Free Cash Flow Building
Free Cash Flow Building CNO Voluntary debt prepayments and RBC build now complete Continued strong statutory performance results in guidance increases to insurance company dividends and share buybacks Confidence in free cash flow evidenced by initiation of common stock dividend 2011 Capital Ge
Slide 11: 2Q12 Recap
2Q12 Recap CNO Investing in our growth Continuing to generate and deploy significant excess capital p Increased share repurchase program and initiated dividend program Profitability, financial strength and credit profile further improving CNO Financial Group 11
Slide 12: 2Q12 Core Business Review
2Q12 Core Business Review Continued to improve performance across all core segments Gains in agent retention and productivity led to an increase in life, Med supp, and LTC sales Continued stability in LTC line Manager Trainee Program fully operational; continue to hire and recruit 2012 class o
Slide 13: Bankers Life 2Q12 Sales and Distribution Results
2Q12 Sales and Distribution Results Bankers Life ($ millions) Quarterly NAP* Agent force grew 9% driven by increased 4Q11 agent retention $69.8 2Q11 3Q11 2Q12 Distribution and market focus allow for shift $60.1 $60.8 1Q12 $58.8 $59.5 in product mix – Overall sales down 1% – Annuity sales down 35
Slide 14: Bankers Life Long Term Care
Long Term Care Bankers Life Proactive management of risk and profitability resulting in continued stability in our LTC business… Bankers utilizes exclusive distribution with a focus on middle income 65+ target market; lower risk profile – no group business Since 2006, have implemented 4 rounds o
Slide 15: Washington National 2Q12 Sales and Distribution Results
2Q12 Sales and Di Distribution t ib ti Results R lt Washington National ($ millions) Quarterly Core NAP* Core* product sales up 18% 4Q11 2Q12 $22.0 3Q11 1Q12 2Q11 $20.7 – Voluntary worksite sales up 23% $18.7 $19.5 $19.6 Investment in life sales continues to gain traction New producing IMOs up
Slide 16: Colonial Penn 2Q12 Sales and Distribution Results
2Q12 Sales and Colonial Penn Di t ib ti Results Distribution R lt Quarterly NAP 1Q12 Sales growth continues, NAP up $17.5 2Q12 22% 2Q11 3Q11 $15.6 4Q11 $12.8 $12.7 $12.3 Increased investments in marketing and advertising driving sales growth Results reflect increase in lead levels and producti
Slide 17: 2012 Outlook
2012 Outlook Strong start with Sales Up In All 3 Core Segments and Positioned Well To Serve Our Target Market Continued investment in branch expansion and management development Introduction of new critical illness product Expect strong sales of life insurance to continue Expect continued he
Slide 18: Net Investment Income
Net Investment Income ($ millions) CNO General Account Investment Income Relatively stable new money rate 2Q12 2Q11 4Q11 1Q12 $351.1 trends and favorable recent earned $342.2 3Q11 $344.2 $345.2 yield i ld progression i with ith lilimited it d iimpactt $ $338.2 from low interest rate environment
Slide 19: Realized Gains/Losses Recognized through Net Income
Realized Gains/Losses Recognized th through hNNett IIncome CNO ($ millions) 2Q11 3Q11 4Q11 1Q12 2Q12 Gross Gains $29.7 $74.5 $41.9 $33.3 $41.6 Gross Losses ((16.7)) ((41.0)) ((10.4)) ((2.5)) ((6.2)) Losses due to recognition of other-than-temporary impairments recognized in earnings (10.1) (2.9) (8.
Slide 20: Impairments
Impairments ($ millions) CNO Low impairments reflect stable portfolio quality and benign $14 U.S. credit environment $12 $10.1 $10 $8 3 $8.3 $7.9 $8 $6 $4 $3.5 $2.9 $2 $0 2Q11 3Q11 4Q11 1Q12 2Q12 IGA Corporates Commercial Mortgage Loans Other CNO Financial Group 20
Slide 21: Unrealized Gain/Loss
Unrealized Gain/Loss* Gain/Loss CNO ($ millions) Unrealized Gain % of Invested Assets $2,500 Unrealized Gain 10% % of Invested Assets 9% $2,000 8% 7% $1,500 6% % 5% $1,000 4% 3% $500 2% 1% $0 0% 2Q11 3Q11 4Q11 1Q12 2Q12 CNO Financial Group *Includes debt and equity securities classified as available
Slide 22: Asset Allocation and Quality at 6/30/12
Asset Allocation and Quality at 6/30/12* 6/30/12 CNO ($ millions) Book Value byy Allocation Investment Quality: y Fixed Maturities Govts/Agency 1.0% Cash & <BBB AAA ABS Other 6 1% 6.1% 5 1% 5.1% 10% 11% AA Municipals 9% 7.3% CMBS 6.0% IG Corporates 54 2% 54.2% HY Corporates BBB A 4.9% 47% 23% Mortga
Slide 23: Holding Company Investments at 6/30/12
Holding ($ millions) g Company p y Investments at 6/30/12 CNO Current Investment Performance Current Investment Allocation Performance Summary 2Q12 YTD Cash & Money Market / Cash & Money Market 0.02% 0.07% Fixed Income Equities / $151.7 Fixed Income 3.15% 4.83% Alternatives $46.0 Equities (2 75%) (2
Slide 24: 2Q12 Investment Summary and Outlook
2Q12 Investment Summary and dOOutlook tl k CNO Market Observations What we are doing… U.S. risk- Remain engaged with credit, U S yields at record lows as investors move to a “risk credit but cautious on off” posture, bearish on Europe and global growth. This high beta names trend is amplified by
Slide 25: 2Q12 Consolidated Summary
2Q12 Consolidated Summary CNO Operating Income* and Book Value Per Share: - Operating income of $54.2 million (20 cents per diluted share) - EBIT growth of 18% after adjusting for significant items - Stable benefit ratios and persistency with elevated mortality in OCB - Book value per share (exclu
Slide 26: Segment EBIT Excluding Significant Items
Segment EBIT Excluding Significant Items* Items CNO ($ millions) $99.8 $84.5 $1.9 CNO’s Earnings Engine $5.1 $33.9 Bankers EBIT driven by favorable $21.8 persistency and insurance policy income Washington National earnings responding to strong sales growth and benefit ratios $68.4 $72.5 Coloni
Slide 27: ASU 2010-26 Impact by Segment
ASU 2010-26 Impact by Segment Q t Ended Quarter E d d June J 30 2012 30, CNO ($ in millions) Three months ended June 30, 2012 R t t d for Restated f ASU 2010-26 2010 26 Before DAC New Change Total In-force Business Bankers Life $ 85.3 $ 76.1 $ 102.6 $ (26.5) Washington National 34.7 33.9 34.2 (0.3)
Slide 28: Capital Generation - $500 Million Run-Rate
Capital Generation - $500 Million Run-Rate CNO ($ millions) 6-month statutory operating earnings of $183mm and statutory dividends of $103mm Anticipate statutory dividends to the holding company of $200 - $275mm in 2012 2010 2011 YTD 2Q12 $500.8 $154.1 $389.7 $346.7 $95.5 $294.2 $245.8 $209.0 **
Slide 29: Holding Company Sources and Uses
Holding Company Sources and Uses CNO ($ in millions) 2010 2011 YTD 2Q12 $346.7 $294.2 $209.0 $166.0 $166.1 $139.1 $145.5 $25.0 $103.0 $55.0 $137.7 $128.2 $90 5 $90.5 $44.0 $114.1 $63.1 Recurring Sources Dividends Recurring Uses* Scheduled Debt P Payments** t ** CNO Financial Group * Includes corpora
Slide 30: Free Cash Flow Run-Rate Building
Free Cash Flow Run-Rate Building ($ in millions) CNO 2011 Capital Generation & Free Cash Flow 2012 – Sources Building While $501 Recurring Uses Moderating RBC ratio in excess of management target; of ~ $360 $155 million in 2011 retained capital, over $100 ($155) million used to build RBC ($61) ($2
Slide 31: Actively Managing Interest Rate Risk
Actively Managing Interest Rate Risk CNO Asset Liability Management Concentrations ALM Strategies Product Statutory Asset Liability Duration – Tight duration management (less than half a year Liabilities Duration* Duration Duration* Duration Variance tolerances across all product portfolios) Fixed
Slide 32: Interest Rate Stress-Test Results
Interest Rate Stress-Test Results CNO Stress Test (Low-for-Long Scenario): New money investment rates consistent with a 10 year treasury at 1.75%, remaining flat for 5 years Net Income Impact Earnings impact (Net Investment Income) – Net investment income impact of 2.5 - 3.5% reduction to growth o
Slide 33: Capital Management – Well Positioned
Capital Management – Well Positioned CNO ($ millions) Liquidity Debt to Total Capital Consolidated RBC Ratio* Ratio** 2Q11 2Q12 2Q11 2Q11 20.4% 369% $234.0 2Q12 351% 16.6% 2Q12 $197.7 Well positioned to absorb market volatility and low-for-long rate impact Active capital management critical to a
Slide 34: CNO: Well Positioned in Growing & Underserved Markets
CNO: Well Positioned in Growing & Underserved Markets The middle-income, pre-retiree and retirement markets are growing as the Baby Boomers age These markets need straightforward products that help address payment of healthcare expenditures, adequacy of retirement, and leaving a legacy for loved
Slide 35: Questions and Answers
Questions and Answers CNO Financial Group 35
Slide 36: Appendix
Appendix CNO Financial Group 36
Slide 37: CNO Value Proposition
CNO Value Proposition Above average growth potential; expected sales growth of 8-12% annually – Percentage of the population 65 years old and older projected to increase by 50% in Growth twenty years Well – On average, over 10,000 Americans will turn 65 each day through 2030 Positioned in Broad
Slide 38: 2Q12 Significant Item
2Q12 ($ millions) Significant Item CNO The table below summarizes the financial impact of a significant item on our 2Q12 net operating income. Management believes that identifying the impact of this item enhances the understanding of our operating results during 2Q12. Three months ended June 30, 201
Slide 39: 2Q11 Significant Item
2Q11 Significant Item CNO ($ millions)) The table below summarizes the financial impact of a significant item on our 2Q11 net operating income. Management believes that identifying the impact of this item enhances the understanding of our operating results during 2Q2011. Three months ended June 30,
Slide 40: Quarterly Earnings CNO
Quarterlyy Earnings g CNO ($ millions) 2Q11 3Q11 4Q11 1Q12 2Q12 Bankers Life $ 72.1 $ 79.4 $ 77.2 $ 70.5 $ 76.1 Washington National 21.8 21.2 28.8 24.7 33.9 C l i lP Colonial Penn 05 0.5 (1 3) (1.3) 18 1.8 (9 8) (9.8) 06 0.6 Other CNO Business 5.1 2.8 - (2.3) 1.9 EBIT* from business segments 99.5 10
Slide 41: Quarterly Earnings Bankers Life
Quarterly Earnings Bankers Life ($ millions) 2Q11 3Q11 4Q11 1Q12 2Q12 Insurance p policy y income $ $409.6 $ $404.6 $ $398.2 $ $406.5 $ $419.0 Net investment income: General account assets 196.5 194.3 198.2 200.3 204.9 Other portfolios 0.4 (36.3) 3.6 34.6 (19.3) Fee revenue and other income 3.3 3.6
Slide 42: Quarterly Earnings Washington National
Quarterly ($ millions) Earnings Washington National 2Q11 3Q11 4Q11 1Q12 2Q12 Insurance policy income $146.6 $145.9 $147.2 $147.4 $147.6 Net investment income: General account assets 46.7 47.3 49.1 50.0 51.0 Other portfolios - - 0.1 - - Fee revenue and other income 0.2 0.4 0.1 0.2 0.3 Total revenues
Slide 43: Quarterly Earnings Colonial Penn
Quarterly ($ millions) Earnings Colonial Penn 2Q11 3Q11 4Q11 1Q12 2Q12 Insurance policy income $50.9 $50.8 $51.0 $53.4 $54.6 Net investment income 10.5 10.1 10.2 10.0 10.2 Fee revenue and other income 0.2 0.2 0.3 0.2 0.2 Total revenues 61.6 61.1 61.5 63.6 65.0 Insurance policy benefits 37.8 35.7 37.
Slide 44: Quarterly Earnings Other CNO Business
Quarterly ($ millions) Earnings Other CNO Business 2Q11 Q 3Q11 Q 4Q11 Q 1Q12 Q 2Q12 Q Insurance policy income $72.5 $72.2 $73.8 $79.0 $73.6 Net investment income: General account assets 87.6 85.4 85.7 84.0 84.0 Other portfolios (0.9) (10.8) 2.4 8.7 (4.2) Total revenues 159.2 146.8 161.9 171.7 153.4
Slide 45: Premiums Collected
Premiums Collected CNO ($ millions) Collected Premiums -Trailing 4 Quarters Trailing 4 quarters down 3% – Bankers down 4% due to 2Q11 3Q11 4Q11 1Q12 decline in annuity sales $3,578.6 $3,580.2 $3,577.6 $3,541.8 2Q12 $3,460.3 – Colonial Penn up 6% due to increased sales – Steady results for Washingt
Slide 46: 2Q12 Holding Company Liquidity
2Q12 Holding Company Liquidity YTD CNO ($ millions) 2Q12 2012 Cash and Investments Balance - Beginning $171.9 $202.8 * Sources S Dividends from Insurance Subsidiaries 58.0 103.0 Dividends from Non-insurance Subsidiaries 4.0 4.0 Surplus Debenture Interest 12.1 24.2 Service and Investment Fees Fees, N
Slide 47: Commercial Mortgage Loans at 6/30/12
Commercial Mortgage Loans at 6/30/12 CNO By Vintage By Property Type Other Mixed 3.5% 2.9% Multi- 2012 2011 Family 2.9% 5.6% 2009 5.0% 2010 2004 and 0.5% 5.1% Industrial Prior 17.5% 23 8% 23.8% 2008 2005 19.0% 7.7% Retail 38.9% Office 32.2% 2006 2007 15.7% 19.7% 6.2% of invested assets based on ma
Slide 48: Commercial Mortgage Loans Portfolio at 6/30/12
Commercial Mortgage Loans CNO P tf li att 06/30/12 Portfolio ($ millions) $1,600 $ $1,400 $1,200 $1,000 $800 $600 $400 $ $200 $- 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026+ Run-off of Principal of Current CML Portfolio Principal Maturities by Year CNO Financial Group
Slide 49: Structured Securities Comparison
Structured Securities Comparison CNO and U U.S. S Insurers CNO We benefit from a lower cost basis, CNO’s securities are more highly rated reflected in higher NAIC ratings NAIC DDesignations i ti ffor M Modeled d l dSSecurities iti (CMBS (CMBS, RMBS) We hold a limited amount of securities 1 2 3 4
Slide 50: European Debt by Select Countries
European Debt by Select Countries CNO ($ 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 $ 20.8 80% 1 Spain - 64 6 64.6 27 9 27.9 92 5 92.5 78 6 78.6 85% 2 Total $ - $ 90.7 $ 27.9
Slide 51: 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 52: 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): 2Q11 3Q11 4Q11 1Q12 2Q12 Net income applicable to common stock $
Slide 53: 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): 2Q11 3Q11 4Q11 1Q12 2Q12 Operating inco
Slide 54: 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 55: 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 56: 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 57: 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 June 30, 2012, is as follows (dollars in millions): Bankers Washington g
Slide 58: 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 59: 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 60: Information Related to Certain Non-GAAP Financial Measures
Information Related to Certain Non-GAAP Financial Measures Debt to capital ratio ratio, excluding accumulated other comprehensive income (loss) This non-GAAP financial measure differs from the debt to capital ratio because accumulated other comprehensive (income) loss has been excluded from the valu