CNO Financial Group, Inc. · NYSE:CNO
CNO Financial — Conseco — Q4 2006 Earnings Presentation
64 slides from CNO Financial's earnings presentation, 2007
Slide 1: Fourth Quarter 2006 Financial and Operating Results
Fourth Quarter 2006 Financial and Operating Results For the period ended December 31, 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 these materials relative to markets for Conseco’s products and trends in Conseco’s operations or financial results, as well as other statements, con
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 Pre-tax operating earnings from Bankers Life: $69.1 million, up from Q3 2006 and Q4 2005 Pre-tax operating earnings from Colonial Penn: $5.4 million, up from Q3 2006 and Q4 2005 Results from the LTC Closed Block continue to be volatile: loss of $57.3 million in Q4 2006
Slide 5: Management's Actions in Q4
Management’s Actions in Q4 CNO In December, announced plans to consolidate certain back-office operations from Chicago to Carmel • Expect to complete consolidation in 2007, reducing expense run rate by $25 million • Management changes to support reorganization: new company-wide operations leader,
Slide 6: New Business Volumes (NAP) Consolidated
New Business Volumes (NAP) CNO Consolidated Q3 2006 Q4 2005 Q2 2006 (in millions) Q1 2006 $91.6 Q4 2006 $89.7 $89.1 $85.8 $87.2 Decrease from Q4 2005 due to decline in Medicare supplement sales, due primarily to competition from Med Advantage and private fee for service plans, partially offset by
Slide 7: Collected Premium Growth
Collected Premium Growth CNO Consolidated $1,077.2 $1,023.2 $76.6 Run-Off ($ millions) $83.5 Consolidated premiums up $54 million (5%) vs. Q4 2005 $621.9 Bankers* Growth in all core businesses $610.0 $349.0 CIG* $302.0 $27.7 $29.7 Colonial Penn* Q4 2005 Q4 2006 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4
Slide 8: Operating EPS (Diluted)
Operating EPS (Diluted) CNO Operating EPS* Operating EPS, Before Q2 2006 Charge** Q4 2005 Q2 2006 Q4 2005 $0.46 $0.44 $0.44 Q1 2006 Q3 2006 Q1 2006 Q3 2006 $0.36 $0.35 $0.36 $0.35 Q4 2006 Q4 2006 $0.04 $0.04 Q2 2006 ($0.21) *Operating earnings per share exclude net realized **Operating earnings per
Slide 9: Operating ROE
Operating ROE CNO Operating ROE*, Trailing 4 Quarters Operating ROE (excl. Q2 2006 charge and NOLs)**, Trailing 4 Quarters Q4 2005 10.3% Q1 2006 Q2 2006 Q4 2005 9.6% Q3 2006 9.3% 8.6% Q1 2006 8.6% 7.7% Q4 2006 6.5% Q2 2006 4.8% Q3 2006 4.1% Q4 2006 2.6% *Operating return excludes net realized **Oper
Slide 10: Q4 Earnings Consolidated
Q4 Earnings CNO Consolidated ($ millions) Q4 2005 Q4 2006 Bankers Life $63.5 $69.1 Conseco Insurance Group 59.1 23.9 Colonial Penn 3.3 5.4 Other Business in Run-Off 17.9 (57.3) Corporate operations, excluding interest expense (13.6) (0.4) Total EBIT* 130.2 40.7 Corporate interest expense and loss on
Slide 11: Q4 Earnings Bankers
Q4 Earnings Bankers ($ millions) Q4 2005 Q4 2006 Insurance policy income $357.8 $387.8 Net investment income 118.3 145.3 Fee revenue and other income 0.9 1.2 Total revenues 477.0 534.3 Insurance policy benefits 285.3 309.8 Amounts added to policyholder account balances 43.2 56.4 Amortization related
Slide 12: Q4 Earnings CIG
Q4 Earnings CIG ($ millions) Q4 2005 Q4 2006 Insurance policy income $255.2 $245.1 Net investment income 175.9 200.7 Fee revenue and other income 0.3 (0.1) Total revenues 431.4 445.7 Insurance policy benefits 189.9 209.8 Amounts added to policyholder account balances 68.9 98.4 Amortization related t
Slide 13: Q4 Earnings Colonial Penn
Q4 Earnings Colonial Penn ($ millions) Q4 2005 Q4 2006 Insurance policy income $28.5 $31.0 Net investment income 9.7 10.2 Fee revenue and other income 0.2 0.2 Total revenues 38.4 41.4 Insurance policy benefits 27.1 26.4 Amounts added to policyholder account balances 0.3 0.3 Amortization related to o
Slide 14: Q4 Earnings Other Business in Run-off
Q4 Earnings Other Business in Run-off ($ millions) Q4 2005 Q4 2006 Insurance policy income $86.7 $82.2 Net investment income 44.2 45.6 Fee revenue and other income 0.1 0.1 Total revenues 131.0 127.9 Insurance policy benefits 86.3 162.7 Amortization related to operations 4.7 5.3 Other operating costs
Slide 15: Book Value Per Diluted Share
Book Value Per Diluted Share* CNO Q2 2006 Q3 2006 Q4 2006 Reflects dilution as if our Q4 2005 Q1 2006 $24.56 $25.84 $25.81 $25.64 $24.26 preferred stock had converted Change in Q4 2006 reflects: • Q4 net loss • Slight increase in diluted shares outstanding *Book value excludes accumulated other
Slide 16: Debt to Total Capital Ratio
Debt to Total Capital Ratio* CNO Increase in Q4 2006 reflects Q4 2005 Q1 2006 Q4 2006 17.3% 16.1% refinancing completed in 15.2% Q2 2006 Q3 2006 14.5% 14.4% October *Excludes accumulated other comprehensive income (loss). See Appendix for corresponding GAAP measure. 16
Slide 17: Consolidated RBC Ratio
Consolidated RBC Ratio* CNO Q4 2005 Q4 2006 Q1 2006 Ratio remains strong 358% 348% Q2 2006 Q3 2006 331% 357% 324% Increase in Q4 2006 reflects contribution of proceeds from October refinancing *Risk-Based Capital (“RBC”) requirements provide a tool for insurance regulators to determine the level
Slide 18: Net Investment Income
Net Investment Income CNO ($ millions) General Account Investment Income, Excluding Corporate Segment Yields increased by 7 bps Q2 2006 Q3 2006 Q4 2006 Q4 2005 Q1 2006 despite low market rate $347.8 $350.3 $356.5 $359.5 $364.3 environment Net investment income from the prepayment of securities: $5
Slide 19: High-Quality Assets
High-Quality Assets CNO Actively Managed Fixed Maturities by Rating at 12/31/06 (Market Value) Portfolio quality remains high BB+ Less than 7% of portfolio is and below 7% below investment grade BBB- 6% AAA 33% BBB 12% BBB+ 11% AA 6% A 25% 12/31/05 3/31/06 6/30/06 9/30/06 12/31/06 % of Bonds whi
Slide 20: Aggregate Interest-Adjusted Health Benefit Ratio
Aggregate Interest-Adjusted Health Benefit Ratio* CNO Aggregate Health Benefit Ratio – By Quarter Loss ratios in our core Core (BLC, CIG & CP) Business businesses increased to 65.8% Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 63.2% 64.2% 62.5% 63.3% 65.8% • Primarily driven by claim reserve deficienci
Slide 21: Expenses
Expenses CNO ($ millions) Gross Operating Expenses*, Trailing 4 Quarters Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 $584.4 $577.9 $573.2 $578.3 $575.4 *Gross operating expenses before capitalization of cost of policies produced, capitalization of software development costs and other adjustments. Costs
Slide 22: Segment Performance CIG
Segment Performance CIG ($ millions) Pre-Tax Operating Income* Q4 2006 includes: Q2 2006 Q4 2005 $64.7 Q3 2006 • Correction of specified disease valuation $59.1 $58.5 errors ($11.7 million, net of amortization) Q1 2006 • $16.1 million related to reserves and $41.9 VOBA on life insurance policies
Slide 23: Benefit Ratio – Medicare Supplement CIG
Benefit Ratio* – Medicare Supplement CIG Q3 2006 Q4 2006 Benefit ratios in 2005 and first half Q4 2005 Q1 2006 Q2 2006 66.8% 64.1% 60.3% of 2006 benefited from release of 58.6% 56.9% policy benefit reserves related to increase in policyholder lapses Persistency improved in Q3 and Q4 2006 Trailin
Slide 24: Interest-Adjusted Benefit Ratio – Specified Disease CIG
Interest-Adjusted Benefit Ratio* – Specified Disease CIG Benefit ratio in Q4 2005 and first half of 2006 reflected higher-than-expected Q4 2006 incurred claims, driven primarily by Q4 2005 Q1 2006 Q2 2006 52.5% 48.1% 48.2% continued incidence of paid claims 45.9% Q3 2006 with old initial incurred
Slide 25: Premiums - Medicare Supplement CIG
Premiums - Medicare Supplement CIG Medicare Supplement – First-Year Premiums ($ millions) Q1 2006 $8.3 Q2 2006 Q4 2006 $7.9 $7.9 49% increase in first-year Q3 2006 premiums vs. Q4 2005 $6.5 Q4 2005 94% increase in 2006 first-year $5.3 premiums vs. 2005 First-Year Prems.-Tr. 4 Qtrs: $15.8 $21.0 $
Slide 26: Premiums – Specified Disease CIG
Premiums – Specified Disease CIG Specified Disease – First-Year Premiums ($ millions) Q4 2005 Q1 2006 $7.4 Q2 2006 Q4 2006 $7.2 Q3 2006 NAP at PMA (wholly owned $7.0 $6.8 $7.1 distribution subsidiary) gaining momentum First-Year Prems.-Tr. 4 Qtrs: $30.6 $29.7 $28.8 $28.4 $28.1 Total Premiums-Quart
Slide 27: Premiums – Life Insurance CIG
Premiums – Life Insurance CIG ($ millions) Life – First-Year Premiums Line being revitalized • New channel leader hired in May Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 $1.7 $1.7 $1.7 • 3 field VPs added $1.6 $1.6 First-Year Prems.-Tr. 4 Qtrs: $8.2 $7.1 $6.7 $6.7 $6.7 Total Premiums-Quarterly: $76.3
Slide 28: Premiums – Annuity CIG
Premiums – Annuity CIG ($ millions) Annuity – First-Year Premiums Q3 2006 Continued strength $178.8 • First-year premiums up 95% for quarter, 193% for year Q4 2006 $118.1 • TSA and IMO channels gaining Q2 2006 $87.0 momentum Q4 2005 $60.7 • Significant contributions from our Q1 2006 national partn
Slide 29: Segment Summary CIG
Segment Summary CIG Continued focus on: • Executing our Worksite strategy • Building our Life Insurance strategy • Establishing national partner relationships • Product development • Health Insurance producer recruiting 29
Slide 30: Segment Performance Bankers
Segment Performance Bankers ($ millions) Pre-Tax Operating Income* Q3 2006 Q4 2006 Q4 2005 Q2 2006 $68.4 $69.1 Q4 2005-Q4 2006 earnings $63.5 Q1 2006 $63.7 improvement driven by: $57.2 • Improving Medicare Supplement benefit ratio • Higher investment income • Coventry quota share/distribution fee
Slide 31: Benefit Ratio – Medicare Supplement Bankers
Benefit Ratio* – Medicare Supplement Bankers Q4 2005 Q1 2006 Q2 2006 Improving benefit ratio reflects: 70.5% 68.1% 67.9% Q3 2006 65.7% Q4 2006 65.4% • Pricing action taken early in 2006 • Claim redundancies for 2005 and prior incurred claims • Claim experience continues to be favorable Trailing 4
Slide 32: Interest-Adjusted Benefit Ratio – Long Term Care Bankers
Interest-Adjusted Benefit Ratio* – Long Term Care Bankers Q4 2006 Increase in Q4 2006 ratio reflects: Q3 2006 76.9% Q4 2005 Q1 2006 Q2 2006 68.8% 67.0% 66.9% 66.8% • Higher initial claims, particularly in more expense-comprehensive policies • Higher persistency • Approximately $8.4 million of clai
Slide 33: Premiums – Medicare Supplement/PDP Bankers
Premiums – Medicare Supplement/PDP Bankers Medicare Supplement – First-Year Premiums ($ millions) Q1 2006 Q4 2006 Q2 2006 $24.8 Q3 2006 $25.3 $24.5 Strong sales Q4 2005 $20.6 $23.2 • Q4 2006 first-year premiums up 23% vs. Q4 2005 • 2006 first-year premiums up 32% vs. 2005 • $77 million of PDP coll
Slide 34: New Product Rollout – Medicare Advantage Private Fee
New Product Rollout – Medicare Advantage Private Fee Bankers Partnering with Coventry Health Care • Fee-based distribution agreement • Quota share reinsurance Strong early indications • Enrolled 14,000 members through 12/31/06 • 66% of sales are new households • 15% of sales replace an existing
Slide 35: Premiums – Long-Term Care Bankers
Premiums – Long-Term Care Bankers Long-Term Care – First-Year Premiums ($ millions) Q4 2005 Steady decline in first-year $15.3 Q1 2006 $14.2 Q2 2006 premiums over the past five $13.1 Q3 2006 Q4 2006 $12.0 $11.9 quarters New sales are meeting our return objectives First-Year Prems.-Tr. 4 Qtrs: $6
Slide 36: Premiums – Life Insurance Bankers
Premiums – Life Insurance Bankers Life – First-Year Premiums ($ millions) Q3 2006 Q2 2006 Growth driven by: $24.4 Q4 2005 $23.3 Q4 2006 $22.0 Q1 2006 $21.9 $20.7 • Continued focus on new agent training • Expanded advanced life insurance training for veteran agents • 2006 first-year premiums up 22%
Slide 37: Premiums – Annuity Bankers
Premiums – Annuity Bankers Annuity – First-Year Premiums ($ millions) Q3 2006 Q4 2005 $277.3 Q4 2006 first-year premiums $263.6 Q1 2006 Q2 2006 Q4 2006 $247.5 $232.5 $237.3 down 6% vs. Q4 2005 2006 first-year premiums up 5% over 2005 First-Year Prems.-Tr. 4 Qtrs: $948.3 $960.5 $960.1 $1,010.7 $9
Slide 38: Segment Summary Bankers
Segment Summary Bankers Improving fundamentals in the business • 65.4% Medicare Supplement benefit ratio • Execution of LTC inforce re-rate actions First-year collected premium • Q4 2006 - $325 million, up 1% over Q4 2005 • FY 2006 - $1,312 million, up 13% over 2005 38
Slide 39: Segment Performance Colonial Penn
Segment Performance Colonial Penn Pre-Tax Operating Income* ($ millions) Q2 2006 $6.5 Earnings improvement driven by: Q1 2006 Q4 2006 $5.4 • Premium growth $5.1 Q3 2006 $4.6 • Favorable benefit ratios Q4 2005 $3.3 PTOI-Trailing 4 Quarters: $20.0 $19.0 $20.3 $19.5 $21.6 Revenues-Quarterly: $38.4 $3
Slide 40: Premiums – Life Insurance Colonial Penn
Premiums – Life Insurance Colonial Penn Life – First-Year Premiums ($ millions) Q3 2006 Q4 2006 Q2 2006 $5.9 Q1 2006 $5.8 $5.7 Growth driven by: Q4 2005 $5.5 $5.0 • Increased but focused ad spend • Expanding breadth of lead sources • Improving direct mail productivity • Expanding product offerings
Slide 41: Segment Summary Colonial Penn
Segment Summary Colonial Penn Focus on business fundamentals delivers profitable growth • At the core, a fact-based, financially disciplined approach • Fact-based management of the profit drivers of our business • Seek continuous improvement in marketing campaigns • Provide quality customer servic
Slide 42: Segment Performance LTC Closed Block
Segment Performance LTC Closed Block Pre-Tax Operating Income* ($ millions) Q1 2006 Q4 2005 $24.0 Results adversely affected by: $17.9 Q2 2006 • $54.1 million from adverse claims $4.4 experience on claims incurred in previous periods of which $24.5 million related to the first three quarters of 20
Slide 43: Interest-Adjusted Benefit Ratio LTC Closed Block
Interest-Adjusted Benefit Ratio* LTC Closed Block Q4 2006 Loss ratio has risen for past three 143.5% quarters Q3 2006 83.1% Q2 2006 64.4% Q4 2005 Q1 2006 49.4% 45.1% Trailing 4 Quarter Avg.: 49.2% 48.4% 52.1% 60.1% 83.2% Qtrly. non-int. adjusted: 99.5% 94.8% 118.0% 136.0% 198.2% *We calculate inte
Slide 44: Program for Improvement LTC Closed Block
Program for Improvement LTC Closed Block Progress continues on initiatives • Premium re-rates • Claims management • Technology • Talent and organizational design 44
Slide 45: Premium Re-rates LTC Closed Block
Premium Re-rates LTC Closed Block Re-rates Submitted: 71% of Goal Re-rates Approved: 46% of Goal $55.6 $41.7 $39.4 $ M illions $ Millions $26.3 $19.2 $9.9 $8.3 $0.0 $0.0 $0.0 8/31/06 10/31/06 3/1/07 8/31/06 10/31/06 3/1/07 Re-rates Implemented: 38% of Goal $35.0 $ M illio n s $13.1 $4.8 $0.0 $0.0 8/
Slide 46: Additional Premium Re-rates LTC Closed Block
Premium Re-rates LTC Closed Block Re-rate revenue will build through 2007 and 2008; not fully reflected until early 2009 Re-Rate Impact on Premium in Force Premium In Force Additional 06 07 07 08 7 8 6 7 8 06 07 08 7 8 -0 -0 l-0 l-0 l-0 -0 -0 v- v- n- n- p- p- p- ar ar ay ay Ju Ju Ju No No Ja Ja Se
Slide 47: Program for Improvement: Claims Management
Program for Improvement LTC Closed Block Claims management • Engaged two leading LTC administration companies to study our current practices • Implemented significant changes to claim eligibility and care management practices • Expect to reduce claims costs throughout 2007 and into 2008 as result
Slide 48: Program for Improvement: Technology
Program for Improvement LTC Closed Block Technology • Installed workflow system to better monitor incoming work and inventories • Progressing on development of improved policy/benefit repository and accumulator tool • Finalizing evaluation of strategic LTC system • Evaluating opportunities to auto
Slide 49: Program for Improvement: Talent and Organizational Design
Program for Improvement LTC Closed Block Talent and organizational design • Increased specialization of claim adjudication teams • Realigned training and audit areas with claim processing function • Continued focus on compliance has led to improved complaint- handling process 49
Slide 50: Segment Summary LTC Closed Block
Segment Summary LTC Closed Block Disappointing financial results for the quarter However, significant progress in: • $35 million premium re-rate program • Improved claims management practices • Implementation of system tools 50
Slide 51: CNO Summary
CNO Summary A messy quarter – significant one-time items Ongoing volatility in LTC Run-off Block Steps to improve earnings: • LTC Run-off: reduction in claims leakage of $10 million per quarter by year-end • LTC Re-rates: re-rates adding in excess of $30 million per year by year-end • Reorgani
Slide 52: Questions and Answers
S CONSECO. Questions and Answers 52
Slide 53: 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 54: 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 55: 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 56: 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): Q4 05 Q1 06 Q2 06 Q3 06 Q4 0
Slide 57: 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 58: 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 59: Appendix: Information Related to Certain Non-GAAP Financial Measures
Appendix: Information Related to Certain Non-GAAP Financial Measures (continued from previous page) Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Average common shareholders' equity 3,569.2 3,733.8 3,622.2 3,836.9 4,045.1 Average common shareholder's equity, excluding accumulated other comprehensive income (loss) (
Slide 60: Appendix: Information Related to Certain Non-GAAP Financial Measures
Appendix: Information Related to Certain Non-GAAP Financial Measures A reconciliation of pretax operating earnings (a non-GAAP financial measure) to segment operating income (loss) and consolidated net income (loss) for the year ended December 31, 2006, is as follows (dollars in millions): Other Bus
Slide 61: Appendix: Information Related to Certain Non-GAAP Financial Measures
Appendix: Information Related to Certain Non-GAAP Financial Measures A reconciliation of common shareholders’ equity, excluding accumulated other comprehensive income (loss) and less income tax assets and assuming conversion of the convertible preferred stock (a non-GAAP financial measure) to common
Slide 62: Appendix: Information Related to Certain Non-GAAP Financial Measures
Appendix: Information Related to Certain Non-GAAP Financial Measures A reconciliation of average common shareholders’ equity, excluding accumulated other comprehensive income (loss) and less income tax assets and assuming conversion of the convertible preferred stock (a non-GAAP financial measure) t
Slide 63: 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 64: 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): Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Corporate notes payable $ 851.5 $ 805.3 $