Attached files
| file | filename |
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| 8-K - FORM 8-K - CNO Financial Group, Inc. | form8k.htm |
1Q11
Financial and operating results for the period ended March 31, 2011
Financial and operating results for the period ended March 31, 2011
May 3, 2011
Unless otherwise specified, comparisons in this presentation are between 1Q11 and 1Q10.
Exhibit 99.1
CNO Financial Group
2
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
statements, contain forward-looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform
Act of 1995. Forward-looking statements typically are identified by the use of terms such as “anticipate,” “believe,” “plan,” “estimate,” “expect,”
“project,” “intend,” “may,” “will,” “would,” “contemplate,” “possible,” “attempt,” “seek,” “should,” “could,” “goal,” “target,” “on track,” “comfortable
with,” “optimistic” and similar words, although some forward-looking statements are expressed differently. You should consider statements that
contain these words carefully because they describe our expectations, plans, strategies and goals and our beliefs concerning future business
conditions, our results of operations, financial position, and our business outlook or they state other ‘‘forward-looking’’ information based on
currently available information. Assumptions and other important factors that could cause our actual results to differ materially from those
anticipated in our forward-looking statements include, among other things: (i) changes in or sustained low interest rates causing a reduction in
investment income, the margins of our fixed annuity and life insurance businesses and demand for our products; (ii) general economic, market
and political conditions, including the performance and fluctuations of the financial markets which may affect the value of our investments as
well as our ability to raise capital or refinance existing indebtedness and the cost of doing so; (iii) the ultimate outcome of lawsuits filed against
us and other legal and regulatory proceedings to which we are subject; (iv) our ability to make changes to certain non-guaranteed elements of
our life insurance products; (v) our ability to obtain adequate and timely rate increases on our health products, including our long-term care
business; (vi) the receipt of any required regulatory approvals for dividend and surplus debenture interest payments from our insurance
subsidiaries; (vii) mortality, morbidity, the increased cost and usage of health care services, persistency, the adequacy of our previous reserve
estimates and other factors which may affect the profitability of our insurance products; (viii) changes in our assumptions related to deferred
acquisition costs or the present value of future profits; (ix) the recoverability of our deferred tax assets and the effect of potential ownership
changes and tax rate changes on their value; (x) our assumption that the positions we take on our tax return filings, including our position that
our 7.0% convertible senior debentures due 2016 will not be treated as stock for purposes of Section 382 of the Internal Revenue Code of
1986, as amended, and will not trigger an ownership change, will not be successfully challenged by the Internal Revenue Service; (xi) changes
in accounting principles and the interpretation thereof (including changes in principles related to accounting for deferred acquisition costs); (xii)
our ability to continue to satisfy the financial ratio and balance requirements and other covenants of our debt agreements; (xiii) our ability to
achieve anticipated expense reductions and levels of operational efficiencies including improvements in claims adjudication and continued
automation and rationalization of operating systems, (xiv) performance and valuation of our investments, including the impact of realized losses
(including other-than-temporary impairment charges); (xv) our ability to identify products and markets in which we can compete effectively
against competitors with greater market share, higher ratings, greater financial resources and stronger brand recognition; (xvi) our ability to
generate sufficient liquidity to meet our debt service obligations and other cash needs; (xvii) our ability to maintain effective controls over
financial reporting; (xviii) our ability to continue to recruit and retain productive agents and distribution partners and customer response to new
products, distribution channels and marketing initiatives; (xix) our ability to achieve eventual upgrades of the financial strength ratings of CNO
Financial and our insurance company subsidiaries as well as the impact of our ratings on our business, our ability to access capital and the cost
of capital; (xx) the risk factors or uncertainties listed from time to time in our filings with the Securities and Exchange Commission; (xxi)
regulatory changes or actions, including those relating to regulation of the financial affairs of our insurance companies, such as the payment of
dividends and surplus debenture interest to us, regulation of the sale, underwriting and pricing of products, and health care regulation affecting
health insurance products; and (xxii) changes in the Federal income tax laws and regulations which may affect or eliminate the relative tax
advantages of some of our products or affect the value of our deferred tax assets. Other factors and assumptions not identified above are also
relevant to the forward-looking statements, and if they prove incorrect, could also cause actual results to differ materially from those projected.
All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements. Our forward-looking statements
speak only as of the date made. We assume no obligation to update or to publicly announce the results of any revisions to any of the forward-
looking statements to reflect actual results, future events or developments, changes in assumptions or changes in other factors affecting the
forward-looking statements.
materials relative to markets for CNO Financial’s products and trends in CNO Financial’s operations or financial results, as well as other
statements, contain forward-looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform
Act of 1995. Forward-looking statements typically are identified by the use of terms such as “anticipate,” “believe,” “plan,” “estimate,” “expect,”
“project,” “intend,” “may,” “will,” “would,” “contemplate,” “possible,” “attempt,” “seek,” “should,” “could,” “goal,” “target,” “on track,” “comfortable
with,” “optimistic” and similar words, although some forward-looking statements are expressed differently. You should consider statements that
contain these words carefully because they describe our expectations, plans, strategies and goals and our beliefs concerning future business
conditions, our results of operations, financial position, and our business outlook or they state other ‘‘forward-looking’’ information based on
currently available information. Assumptions and other important factors that could cause our actual results to differ materially from those
anticipated in our forward-looking statements include, among other things: (i) changes in or sustained low interest rates causing a reduction in
investment income, the margins of our fixed annuity and life insurance businesses and demand for our products; (ii) general economic, market
and political conditions, including the performance and fluctuations of the financial markets which may affect the value of our investments as
well as our ability to raise capital or refinance existing indebtedness and the cost of doing so; (iii) the ultimate outcome of lawsuits filed against
us and other legal and regulatory proceedings to which we are subject; (iv) our ability to make changes to certain non-guaranteed elements of
our life insurance products; (v) our ability to obtain adequate and timely rate increases on our health products, including our long-term care
business; (vi) the receipt of any required regulatory approvals for dividend and surplus debenture interest payments from our insurance
subsidiaries; (vii) mortality, morbidity, the increased cost and usage of health care services, persistency, the adequacy of our previous reserve
estimates and other factors which may affect the profitability of our insurance products; (viii) changes in our assumptions related to deferred
acquisition costs or the present value of future profits; (ix) the recoverability of our deferred tax assets and the effect of potential ownership
changes and tax rate changes on their value; (x) our assumption that the positions we take on our tax return filings, including our position that
our 7.0% convertible senior debentures due 2016 will not be treated as stock for purposes of Section 382 of the Internal Revenue Code of
1986, as amended, and will not trigger an ownership change, will not be successfully challenged by the Internal Revenue Service; (xi) changes
in accounting principles and the interpretation thereof (including changes in principles related to accounting for deferred acquisition costs); (xii)
our ability to continue to satisfy the financial ratio and balance requirements and other covenants of our debt agreements; (xiii) our ability to
achieve anticipated expense reductions and levels of operational efficiencies including improvements in claims adjudication and continued
automation and rationalization of operating systems, (xiv) performance and valuation of our investments, including the impact of realized losses
(including other-than-temporary impairment charges); (xv) our ability to identify products and markets in which we can compete effectively
against competitors with greater market share, higher ratings, greater financial resources and stronger brand recognition; (xvi) our ability to
generate sufficient liquidity to meet our debt service obligations and other cash needs; (xvii) our ability to maintain effective controls over
financial reporting; (xviii) our ability to continue to recruit and retain productive agents and distribution partners and customer response to new
products, distribution channels and marketing initiatives; (xix) our ability to achieve eventual upgrades of the financial strength ratings of CNO
Financial and our insurance company subsidiaries as well as the impact of our ratings on our business, our ability to access capital and the cost
of capital; (xx) the risk factors or uncertainties listed from time to time in our filings with the Securities and Exchange Commission; (xxi)
regulatory changes or actions, including those relating to regulation of the financial affairs of our insurance companies, such as the payment of
dividends and surplus debenture interest to us, regulation of the sale, underwriting and pricing of products, and health care regulation affecting
health insurance products; and (xxii) changes in the Federal income tax laws and regulations which may affect or eliminate the relative tax
advantages of some of our products or affect the value of our deferred tax assets. Other factors and assumptions not identified above are also
relevant to the forward-looking statements, and if they prove incorrect, could also cause actual results to differ materially from those projected.
All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements. Our forward-looking statements
speak only as of the date made. We assume no obligation to update or to publicly announce the results of any revisions to any of the forward-
looking statements to reflect actual results, future events or developments, changes in assumptions or changes in other factors affecting the
forward-looking statements.
CNO Financial Group
3
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 measures; earnings before net realized
investment gains (losses) and corporate interest and taxes; debt to capital ratios,
excluding accumulated other comprehensive income (loss); and interest-adjusted benefit
ratios. Reconciliations between those non-GAAP measures and the comparable GAAP
measures are included in the Appendix, or on the page such measure is presented.
comparable measures under Generally Accepted Accounting Principles (GAAP):
operating earnings measures; book value, excluding accumulated other comprehensive
income (loss) per share; operating return measures; earnings before net realized
investment gains (losses) and corporate interest and taxes; debt to capital ratios,
excluding accumulated other comprehensive income (loss); and interest-adjusted benefit
ratios. Reconciliations between those non-GAAP measures and the comparable GAAP
measures are included in the Appendix, or on the page such measure is presented.
While management believes these measures are useful to enhance understanding and
comparability of our financial results, these non-GAAP measures should not be
considered substitutes for the most directly comparable GAAP measures.
comparability of our financial results, these non-GAAP measures should not be
considered substitutes for the most directly comparable GAAP measures.
Additional information concerning non-GAAP measures is included in our periodic filings
with the Securities and Exchange Commission that are available in the “Investors - SEC
Filings” section of CNO’s website, www.CNOinc.com.
with the Securities and Exchange Commission that are available in the “Investors - SEC
Filings” section of CNO’s website, www.CNOinc.com.
CNO Financial Group
4
CNO Financial Group
5
1Q11: Summary
CNO
§ Net income of $53.9 million, compared to $33.9 million
§ Net operating income* up 36% to $51.9 million, or 18 cents per diluted
share
share
§ Consolidated RBC at 341%, up 9 percentage points from 12/31/10
– Driven by statutory earnings of $101 million
– Partially offset by $60 million of dividend payments to our holding company
§ Holding company liquidity at $169 million, up $8 million from 12/31/10
– Primarily reflecting the aforementioned dividend payments
– Partially offset by $50 million prepayment of debt
§ Debt to total capital ratio at 19.2%, down from 20.0% at 12/31/10
§ Core sales** down 1% from 1Q10
§ Seeking to amend our senior secured credit facility
*Management believes that an analysis of net income applicable to common stock before: (1) loss on extinguishment of debt, net of income taxes; (2) net realized investment gains or losses, net of related amortization
and income taxes; and (3) increases or decreases in the valuation allowance related to deferred tax assets (“Net operating income,” a non-GAAP financial measure) is important to evaluate the financial performance
of the company, and is a key measure commonly used in the life insurance industry. Management uses this measure to evaluate performance because such items can be affected by events that are unrelated to the
company’s underlying fundamentals. The table on page 7 reconciles the non-GAAP measure to the corresponding GAAP measure.
and income taxes; and (3) increases or decreases in the valuation allowance related to deferred tax assets (“Net operating income,” a non-GAAP financial measure) is important to evaluate the financial performance
of the company, and is a key measure commonly used in the life insurance industry. Management uses this measure to evaluate performance because such items can be affected by events that are unrelated to the
company’s underlying fundamentals. The table on page 7 reconciles the non-GAAP measure to the corresponding GAAP measure.
**Excludes PFFS and PDP.
CNO Financial Group
6
1Q11 Summary of Results
CNO
($ millions, except per-share amounts)
CNO Financial Group
7
Quarterly Earnings
CNO
*Management believes that an analysis of earnings before net realized investment gains (losses), corporate interest, loss on extinguishment
of debt and taxes (“EBIT,” a non-GAAP financial measure) provides a clearer comparison of the operating results of the company quarter-
over-quarter because it excludes: (1) corporate interest expense; (2) loss on extinguishment of debt; and (3) net realized investment gains
(losses) that are unrelated to the company’s underlying fundamentals. The table above provides a reconciliation of EBIT to net income.
of debt and taxes (“EBIT,” a non-GAAP financial measure) provides a clearer comparison of the operating results of the company quarter-
over-quarter because it excludes: (1) corporate interest expense; (2) loss on extinguishment of debt; and (3) net realized investment gains
(losses) that are unrelated to the company’s underlying fundamentals. The table above provides a reconciliation of EBIT to net income.
($ millions)
CNO Financial Group
8
Operating ROE
CNO
Operating ROE*, Trailing 4 Quarters
*Operating return excludes loss on extinguishment of debt, net realized investment gains (losses) and change in valuation allowance
related to deferred tax assets. Equity excludes accumulated other comprehensive income (loss) and the value of net operating loss
carryforwards. See Appendix for a reconciliation to the corresponding GAAP measure.
related to deferred tax assets. Equity excludes accumulated other comprehensive income (loss) and the value of net operating loss
carryforwards. See Appendix for a reconciliation to the corresponding GAAP measure.
|
Average common shareholders’ equity,
excluding AOCI/L and net operating loss carryforwards, trailing 4 quarters: |
$2,679.2
|
$2,808.3
|
$2,942.8
|
$3,048.5
|
$3,129.7
|
($ millions)
CNO Financial Group
9
Operating EPS* (Diluted)
§ Increased EPS despite dilution
* Operating earnings per share exclude loss on extinguishment of debt, net realized investment gains (losses) and valuation allowance
related to deferred tax assets. See Appendix for a reconciliation to the corresponding GAAP measure.
related to deferred tax assets. See Appendix for a reconciliation to the corresponding GAAP measure.
** Includes the dilutive impact from convertible debentures. See the appendix for additional details.
|
Weighted average diluted shares (in millions)**:
|
292.1
|
302.6
|
306.0
|
306.7
|
307.5
|
CNO Financial Group
10
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 March 31, 2011 was $14.37
CNO Financial Group
11
CNO Financial Group
12
CNO Financial Group
13
Financial Strength
CNO
§ RBC increased to 341% in 1Q11
– Positive impact primarily from statutory
operating income of $101 million (+21 points)
operating income of $101 million (+21 points)
– Partially offset by dividend payments to our
holding company of $60 million (-13 points)
holding company of $60 million (-13 points)
*Risk-Based Capital (“RBC”) requirements provide a tool for insurance regulators to determine the
levels of statutory capital and surplus an insurer must maintain in relation to its insurance and
investment risks. The RBC ratio is the ratio of the statutory consolidated adjusted capital of our
insurance subsidiaries to RBC.
levels of statutory capital and surplus an insurer must maintain in relation to its insurance and
investment risks. The RBC ratio is the ratio of the statutory consolidated adjusted capital of our
insurance subsidiaries to RBC.
Consolidated RBC Ratio*
Liquidity
($ millions)
|
21.6%
|
21.3%
|
21.2%
|
20.0%
|
19.2%
|
|
Debt to Total Capital Ratio**
|
**as defined in our Senior Secured Credit Agreement. See appendix for reconciliation
to GAAP measure.
to GAAP measure.
§ Unrestricted cash held at the holding
company increased $8 million during 1Q11
company increased $8 million during 1Q11
– Primarily reflecting the dividend payments
from our insurance subsidiaries
from our insurance subsidiaries
– Offset by $50 million prepayment of debt
CNO Financial Group
14
§ Earnings of $63.9 million, up 20%
– Results were favorably impacted by:
• $14 million from improved spreads and growth in the annuity block
• $11 million due to favorable reserve impacts in long-term care
• $7 million due to favorable claim development in Medicare supplement
– Medicare supplement results were unfavorably impacted by $23 million
additional amortization of insurance intangibles primarily resulting from
higher 1Q11 policy lapses and conversions
additional amortization of insurance intangibles primarily resulting from
higher 1Q11 policy lapses and conversions
1Q Summary
Bankers Life
CNO Financial Group
15
Sales and Distribution Results
§ Mixed sales results
– Continued strong life sales, up 5%
– Lower Med supp sales, down 5%,
and LTC sales, down 19%,
impacted by consumer preference
for lower cost products
and LTC sales, down 19%,
impacted by consumer preference
for lower cost products
Bankers Life
Quarterly NAP*
*PFFS and PDP sales are not comparable and are excluded from NAP in all periods; in addition, we no longer assume any of the risks on
PFFS contracts through reinsurance.
PFFS contracts through reinsurance.
($ millions)
|
Med supp policies issued (in thousands):
|
10.6
|
12.6
|
10.2
|
19.7
|
11.4
|
§ Recruiting gaining momentum
– New agent contracts up 27% over 4Q10
– Agent force stable; 1st year productive agents up 3% over 4Q10
– Branch expansion ahead of schedule; opened 10 of 15 locations
CNO Financial Group
16
Medicare Supplement Update
Bankers Life
§ Industry and Competition
– Leading competitor pulling Plan N and significantly increasing rate on in-
force and new business
force and new business
– Bankers plans to take no pricing actions this year, as product is
performing to profit expectations
performing to profit expectations
§ 1Q11 Highlights
– 5% decline in sales compared to 1Q10, but a 7% increase in policies
issued reflecting shift to lower-premium Plan N
issued reflecting shift to lower-premium Plan N
– Recent reduction in policies returned during “free look” period, indicative
of improved competitive position
of improved competitive position
CNO Financial Group
17
Bankers Life
§ Stable financial results
– Continued claims management improvements contributed to $11 million
favorable reserve development in 1Q11
favorable reserve development in 1Q11
§ Rate increase filings continue
– Filing for increases on most plans sold between 2002 and 2005
– Filing for increases on inflationary plans sold between 1992 and 2003
– Expect to implement rate increases of $37 million
• Approximately $11 million of approvals received as of 3/31/11
§ Sales down 19% reflecting consumer preferences for lower priced
products
products
– New product rolled out with lower exposure to higher risk benefits
• Priced to achieve target returns
• Partly reinsured
LTC Update
CNO Financial Group
18
Quarterly Earnings
Management believes that an analysis of income before net realized investment gains (losses), net of related amortization (a non-GAAP
financial measure), is important to evaluate the financial performance of our business, and is a measure commonly used in the life insurance
industry. Management uses this measure to evaluate performance because realized gains or losses can be affected by events that are
unrelated to a company’s underlying fundamentals. The table on Page 7 reconciles the non-GAAP measure to the corresponding GAAP
measure. See Appendix for a reconciliation of the return on equity measure to the corresponding GAAP measure.
financial measure), is important to evaluate the financial performance of our business, and is a measure commonly used in the life insurance
industry. Management uses this measure to evaluate performance because realized gains or losses can be affected by events that are
unrelated to a company’s underlying fundamentals. The table on Page 7 reconciles the non-GAAP measure to the corresponding GAAP
measure. See Appendix for a reconciliation of the return on equity measure to the corresponding GAAP measure.
Trailing 4 Quarter Operating Return on Allocated Capital: 12.0%
Bankers Life
($ millions)
CNO Financial Group
19
1Q Summary
Washington National
§ Earnings of $25.2 million, down $2.4 million primarily from favorable
reserve refinements related to our life products in 1Q10
reserve refinements related to our life products in 1Q10
§ Sales (NAP) of $17 million, up 3%
– Supplemental health NAP of $15.7 million, up 7%
§ Solid recruiting results for the WNIC Independent channel
CNO Financial Group
20
Washington National
§ Supplemental health sales up 7%
§ Life sales up 7%
1Q10 NAP
1Q11 NAP
1Q11 Sales Results
($ millions)
CNO Financial Group
21
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 in the life
insurance industry. Management uses this measure to evaluate performance because realized gains or losses can be affected by events
that are unrelated to a company’s underlying fundamentals. The table on Page 7 reconciles the non-GAAP measure to the corresponding
GAAP measure.
GAAP financial measure), is important to evaluate the financial performance of our business, and is a measure commonly used in the life
insurance industry. Management uses this measure to evaluate performance because realized gains or losses can be affected by events
that are unrelated to a company’s underlying fundamentals. The table on Page 7 reconciles the non-GAAP measure to the corresponding
GAAP measure.
Trailing 4 Quarter Operating Return on Allocated Capital: 9.4%
($ millions)
CNO Financial Group
22
§ Earnings of $5.4 million, compared to $5.3 million
§ Sales growth continues, NAP up 4%
1Q Summary
Colonial Penn
CNO Financial Group
23
Quarterly Earnings
Colonial Penn
Management believes that an analysis of income before net realized investment gains (losses), net of related amortization (a non-GAAP
financial measure), is important to evaluate the financial performance of our business, and is a measure commonly used in the life
insurance industry. Management uses this measure to evaluate performance because realized gains or losses can be affected by events
that are unrelated to a company’s underlying fundamentals. The table on Page 7 reconciles the non-GAAP measure to the corresponding
GAAP measure. See Appendix for a reconciliation of the return on equity measure to the corresponding GAAP measure.
financial measure), is important to evaluate the financial performance of our business, and is a measure commonly used in the life
insurance industry. Management uses this measure to evaluate performance because realized gains or losses can be affected by events
that are unrelated to a company’s underlying fundamentals. The table on Page 7 reconciles the non-GAAP measure to the corresponding
GAAP measure. See Appendix for a reconciliation of the return on equity measure to the corresponding GAAP measure.
Trailing 4 Quarter Operating Return on Allocated Capital: 7.5%
($ millions)
CNO Financial Group
24
§ Earnings of $7.1 million, compared to loss of $1.9 million
– Favorable mortality in 1Q11
– Results in 1Q10 were unfavorably impacted by changes in assumptions
related to when certain non-guaranteed elements will be implemented
related to when certain non-guaranteed elements will be implemented
1Q Summary
Other CNO Business
CNO Financial Group
25
Quarterly Earnings (Losses)
Other CNO Business
Management believes that an analysis of income (loss) before net realized investment gains (losses), net of related amortization (a non-
GAAP financial measure), is important to evaluate the financial performance of our business, and is a measure commonly used in the life
insurance industry. Management uses this measure to evaluate performance because realized gains or losses can be affected by events
that are unrelated to a company’s underlying fundamentals. The table on Page 7 reconciles the non-GAAP measure to the corresponding
GAAP measure.
GAAP financial measure), is important to evaluate the financial performance of our business, and is a measure commonly used in the life
insurance industry. Management uses this measure to evaluate performance because realized gains or losses can be affected by events
that are unrelated to a company’s underlying fundamentals. The table on Page 7 reconciles the non-GAAP measure to the corresponding
GAAP measure.
($ millions)
CNO Financial Group
26
Summary of Proposed Amendments to
Senior Secured Credit Facility*
Senior Secured Credit Facility*
CNO
* There can be no assurance that the proposed amendments will be achieved
§ Reduce spread by 100 bps to L+500 bps and reduce the LIBOR floor by
25 bps to 1.25%
25 bps to 1.25%
§ Introduce step downs for mandatory prepayments due to Restricted
Payments
Payments
– Requirement steps down to $0.50 prepayment for every $1 of Restricted
Payments if Debt / Total Capitalization ≤17.5%
Payments if Debt / Total Capitalization ≤17.5%
– No required prepayment if Debt / Total Capitalization ≤12.5%
§ Provide flexibility to make permitted investments at holding company
– Will allow CNO to better utilize tax benefits from non-life operating loss
carryforwards
carryforwards
§ Increase the cap on non-investment grade investments from 10% to 12%
CNO Financial Group
27
Excess Capital Utilization Opportunities
§ Debt Prepayment
§ Share Buybacks
§ Common Stock Dividends
§ Investing in Business for Additional Growth
§ Build Holding Company Investment Portfolio
– Utilize non-life operating loss carryforward
CNO
CNO Financial Group
28
GAAP Balances for Deferred Tax Asset as of 3/31/11:
Loss Carryforwards - Gross1 vs. Net2
Loss Carryforwards - Gross1 vs. Net2
($ 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 loss carryforward equals the gross loss carryforward net of the allowance
Totals
Gross Loss Carryforwards
Net Loss Carryforwards
Valuation Allowance
CNO
GAAP valuation allowances do
not impact our ability to
recognize economic benefits
from the carryforwards.
not impact our ability to
recognize economic benefits
from the carryforwards.
CNO Financial Group
29
Net Investment Income
CNO
§ Increase in investment income
primarily due to growth in assets
primarily due to growth in assets
§ Implemented $750mm FHLB floating
rate program in 2010, increasing net
investment income
rate program in 2010, increasing net
investment income
§ 2010 portfolio yield increase
(excluding FHLB) due primarily to new
money investments
(excluding FHLB) due primarily to new
money investments
General Account Investment Income
|
Earned Yield:
|
5.76%
|
5.83%
|
5.86%
|
5.77%
|
5.79%
|
($ millions)
|
Earned Yield (excluding floating rate FHLB):
|
5.76%
|
5.83%
|
5.87%
|
5.84%
|
5.90%
|
|
New Money Rate (excluding floating rate FHLB):
|
6.21%
|
6.26%
|
6.00%
|
5.96%
|
5.60%
|
CNO Financial Group
30
Realized Gains/Losses Recognized
through Net Income
CNO
($ millions)
CNO Financial Group
31
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.
consolidate under GAAP.
CNO Financial Group
32
1Q11 Impairments
CNO
($ millions)
CNO Financial Group
33
Asset Allocation at 3/31/11*
CNO
*Excludes investments from variable interest entities which we consolidate under GAAP (the related liabilities are non-recourse to CNO).
($ millions)
CNO Financial Group
34
Investment Quality: Fixed Maturities*
CNO
§ 90% investment grade
§ Favorable corporate bond ratings
trends
trends
§ RMBS Ratings erosion due to
seasoning effect (no NAIC RBC
impact)
seasoning effect (no NAIC RBC
impact)
Fixed Maturities, available for sale, by Rating
at 3/31/11 (Market Value)
at 3/31/11 (Market Value)
|
% of Bonds which are Investment Grade:
|
3/31/10
93%
|
6/30/10
92%
|
9/30/10
92%
|
12/31/10
91%
|
3/31/11
90%
|
*Excludes investments from variable interest entities which we consolidate under GAAP (the related liabilities are non-recourse to CNO).
AAA
13%
AA
9%
A
23%
BBB
45%
<BBB
10%
CNO Financial Group
35
Alt-A at 3/31/11
CNO
§ 1.3% of total invested assets
§ 100% NAIC 1 classification
§ Collateral performing better than overall Alt-A collateral universe in terms of delinquency and
accumulated loss trends
accumulated loss trends
§ All securities evaluated using market-consistent estimates of future collateral performance
§ Substantial proportion of investments purchased at discounts reflective of current market
expectations for cash flows from collateral
expectations for cash flows from collateral
§ 1Q downgrades consistent with expectations for seasoning effect on collateral and credit support
*Market value.
($ millions)
CNO Financial Group
36
Prime Jumbo at 3/31/11
CNO
§ 4.6% of total invested assets
§ 99.3% NAIC 1 classification
§ Substantial proportion of investments purchased at discounts reflective of current market
expectations for cash flows from collateral
expectations for cash flows from collateral
§ All securities evaluated using market-consistent estimates of collateral performance
§ Credit support remains substantial relative to anticipated cumulative losses
§ Collateral performing within expectations
*Market value.
($ millions)
CNO Financial Group
37
CMBS at 3/31/11
CNO
($ millions)
Pre-2004
18.8%
2004
11.5%
2005
23.0%
2006
19.2%
2007
21.9%
2009
3.7%
2010
1.4%
2011
.5%
CNO Financial Group
38
CMBS at 3/31/11
CNO
§ 5.9% of invested assets
§ 99.6% NAIC 1 classification
§ Collateral performing materially better than overall CMBS collateral universe in terms of delinquency
and cumulative loss
and cumulative loss
§ All securities evaluated using market-consistent estimates of collateral performance
§ Substantial credit support inherent in structures relative to expected cumulative losses
§ Collateral performing within expectations
*% of market value
($ millions)
CNO Financial Group
39
Commercial Mortgage Loans at 3/31/11
By Vintage
CNO
By Property Type
§ Trailing debt service coverage ratio (DSCR) stable at approximately 1.39
§ As of 3/31/11, 1 delinquent loan ($.1mm unpaid balance)
2010
4.7%
4.7%
2009
0.4%
0.4%
2008
18.8%
18.8%
2007
20.4%
20.4%
2006
18.4%
18.4%
2005
9.5%
9.5%
2004 and
Prior
27.0%
Prior
27.0%
Office
36.9%
36.9%
Other
0.2%
0.2%
Retail
40.1%
40.1%
Multi-
Family
4.8%
Family
4.8%
2011
0.8%
0.8%
Industry
18.0%
18.0%
CNO Financial Group
40
Summary
§ Solid earnings continued in 1Q
§ Capital generation creates unique opportunities
– Generating significant amounts of excess capital
– Retaining more capital in holding company to generate more non-life
income and utilize operating loss carryforwards
income and utilize operating loss carryforwards
§ Continued emphasis on profitable growth
– 2011 first year baby boomers begin turning 65
– Adding 15 new locations for Bankers Life in 2011
– Expanding PMA’s recruiting capacity and sales management team
§ Retirement of Baby Boom Generation is a huge opportunity for CNO
CNO
CNO Financial Group
41
Questions and Answers
CNO Financial Group
42
Appendix
CNO Financial Group
43
Covenant Metrics
Interest Coverage Ratio
Statutory Surplus ($ millions)
* Excludes Accumulated Other Comprehensive Income (Loss), as defined by the senior credit facility
** Not applicable to periods prior to 3/31/11
$1,200
CNO
225%
Covenants levels per
agreement
agreement
2.0
**
**
**
**
CNO Financial Group
44
1Q11 Holding Company Liquidity
CNO
($ millions)
CNO Financial Group
45
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 3/31/2011, CNO’s stock closed at $7.51.
period. On 3/31/2011, CNO’s stock closed at $7.51.
(1)
Maturity Profile Prior to 4Q10 Refinancing
Current Maturity Profile
($ millions)
$90
CNO
Debt Maturity Profile
CNO Financial Group
46
Operating Return on Allocated Capital Computation*
Adjusted operating earnings for the purpose of calculating operating return on allocated
capital is determined as follows:
capital is determined as follows:
Allocated capital is calculated as follows:
* A non-GAAP financial measure. Refer to the Appendix for a reconciliation to the corresponding GAAP measure.
Operating Return on Allocated Capital: 12.0% 9.4% 7.5% -2.1% -4.2% 6.3%
($ millions)
CNO Financial Group
47
Commercial Mortgage Loans at 3/31/11
CNO
Pacific
9.8%
Mountain
10.2%
West North
Central
Central
13.8%
West South
Central
Central
6.2%
East North
Central
Central
15.8%
East South
Central
Central
3.1%
New England
8.9%
Middle
Atlantic
Atlantic
8.4%
South
Atlantic
Atlantic
23.8%
CNO Financial Group
48
Commercial Mortgage Loans at 3/31/11
Remaining Principal
Balance
Balance
By Maturity
CNO
($ millions)
CNO Financial Group
49
Premiums Collected
CNO
§ Trailing 4 quarters down 9%
– Stable results at Bankers Life
(excluding PFFS), Washington
National, and Colonial Penn
(excluding PFFS), Washington
National, and Colonial Penn
– Decline at OCB primarily due
to continued run-off of inforce
blocks, as expected
to continued run-off of inforce
blocks, as expected
CP
Washington
National
National
Collected Premiums -Trailing 4 Quarters
1Q10
$3,937.2
2Q10
$3,819.6
BLC Other
3Q10
$3,651.1
BLC PFFS
4Q10
$3,590.1
1Q11
$3,586.7
OCB
($ millions)
CNO Financial Group
50
Premiums Collected - Med Supp
§ First-year premiums down 8%
Med Supp - First-Year Premiums
Bankers Life
($ millions)
Policies issued and not included in NAP (net of chargebacks, in thousands):
|
PFFS policies issued:
|
22.8
|
-0.4
|
0.1
|
0.4
|
9.7
|
|
PDP policies issued:
|
8.0
|
0.3
|
1.0
|
0.4
|
8.1
|
|
Med Supp First-Year Prems.-Tr. 4 Qtrs:
|
$99.2
|
$107.5
|
$114.1
|
$116.4
|
$114.3
|
|
Med Supp Total Premiums-Quarterly:
|
$176.6
|
$168.8
|
$170.1
|
$182.3
|
$178.8
|
|
Med Supp NAP-Quarterly:
|
$19.4
|
$21.0
|
$16.0
|
$31.8
|
$18.3
|
|
Med Supp NAP-Trailing 4 Quarters:
|
$115.3
|
$117.1
|
$113.2
|
$88.2
|
$87.1
|
CNO Financial Group
51
Premiums Collected - LTC
§ Net first-year premiums up 27%,
reflecting reduction in new
business reinsurance
reflecting reduction in new
business reinsurance
First-Year Prems.-Tr. 4 Qtrs: $18.3 $19.1 $21.9 $22.2 $23.5
Total Premiums-Quarterly: $149.5 $146.6 $145.0 $143.5 $144.9
Long-Term Care - First-Year Premiums*
NAP-Quarterly: $8.6 $8.7 $7.2 $6.7 $6.9
NAP-Trailing 4 Quarters: $36.5 $35.4 $32.8 $31.2 $29.5
*Includes $4.3 million in 1Q10, $3.7 million in 2Q10, $2.8 million in 3Q10, $2.0 million in 4Q10, and $1.5 million in 1Q11 of premiums
ceded under business reinsurance agreement.
ceded under business reinsurance agreement.
1Q10
(Direct)
$9.1
2Q10
(Direct)
$9.2
3Q10
(Direct)
$8.5
4Q10
(Direct)
$8.2
1Q11
(Direct)
$7.6
Bankers Life
($ millions)
CNO Financial Group
52
Premiums Collected - Life
§ First-year premiums up 22%
First-Year Prems.-Tr. 4 Qtrs: $86.0 $91.4 $93.8 $97.7 $102.2
Total Premiums-Quarterly: $46.5 $52.1 $54.8 $56.2 $56.4
Life - First-Year Premiums
NAP-Quarterly: $15.8 $17.3 $16.3 $15.9 $16.6
NAP-Trailing 4 Quarters: $60.9 $62.6 $63.1 $65.3 $66.1
SPWL
Non-
SPWL
1Q10
$20.2
$9.6
$10.6
1Q11
$24.7
$12.4
$12.4
2Q10
$24.8
$11.9
$13.9
3Q10
$25.8
$12.3
$14.6
4Q10
$26.9
$11.0
$13.7
Bankers Life
($ millions)
CNO Financial Group
53
Premiums Collected - Annuity
§ First-year premiums down 1%
First-Year Prems.-Tr. 4 Qtrs: $979.1 $984.4 $965.1 $1,001.2 $999.4
Total Premiums-Quarterly: $224.4 $281.1 $265.8 $234.4 $222.2
Annuity - First-Year Premiums
Bankers Life
($ millions)
CNO Financial Group
54
Premiums Collected -
Supplemental Health
Washington National
§ First-year premiums up 6%
– Increased focus on supplemental
health products
health products
First-Year Prems.-Tr. 4 Qtrs: $47.7 $49.7 $50.9 $52.0 $52.7
Total Premiums-Quarterly: $99.6 $100.2 $101.5 $104.2 $106.5
Supplemental Health - First-Year Premiums
NAP-Quarterly: $14.6 $17.5 $18.0 $17.5 $15.7
NAP-Trailing 4 Quarters: $60.6 $63.4 $65.3 $67.6 $68.7
($ millions)
CNO Financial Group
55
Premiums Collected - Life
Colonial Penn
§ First-year premiums up 10%
First-Year Prems.-Tr. 4 Qtrs: $31.7 $31.4 $31.6 $32.3 $33.1
Total Premiums-Quarterly: $47.3 $46.7 $46.9 $46.8 $49.4
Life - First-Year Premiums
NAP-Quarterly: $13.1 $12.2 $11.5 $9.5 $13.6
NAP-Trailing 4 Quarters: $42.7 $44.3 $45.2 $46.3 $46.8
($ millions)
CNO Financial Group
56
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 amounts
that are normally excluded or included in the most directly comparable measure calculated and presented in accordance with
GAAP. While management believes these measures are useful to enhance understanding and comparability of our financial
results, these non-GAAP measures should not be considered as substitutes for the most directly comparable GAAP measures.
Additional information concerning non-GAAP measures is included in our periodic filings with the Securities and Exchange
Commission that are available in the “Investors - SEC Filings” section of CNO’s website, www.CNOinc.com.
measure is a numerical measure of a company’s performance, financial position, or cash flows that excludes or includes amounts
that are normally excluded or included in the most directly comparable measure calculated and presented in accordance with
GAAP. While management believes these measures are useful to enhance understanding and comparability of our financial
results, these non-GAAP measures should not be considered as substitutes for the most directly comparable GAAP measures.
Additional information concerning non-GAAP measures is included in our periodic filings with the Securities and Exchange
Commission that are available in the “Investors - SEC Filings” section of CNO’s website, www.CNOinc.com.
Operating earnings measures
Management believes that an analysis of net income applicable to common stock before loss on extinguishment of debt, net
realized gains or losses and increases or decreases to our valuation allowance for deferred tax assets (“net operating income,” a
non-GAAP financial measure) is important to evaluate the performance of the Company and is a key measure commonly used in
the life insurance industry. Management uses this measure to evaluate performance because loss on extinguishment of debt,
realized investment gains or losses and increases or decreases to our valuation allowance for deferred tax assets are unrelated to
the Company’s continuing operations.
Management believes that an analysis of net income applicable to common stock before loss on extinguishment of debt, net
realized gains or losses and increases or decreases to our valuation allowance for deferred tax assets (“net operating income,” a
non-GAAP financial measure) is important to evaluate the performance of the Company and is a key measure commonly used in
the life insurance industry. Management uses this measure to evaluate performance because loss on extinguishment of debt,
realized investment gains or losses and increases or decreases to our valuation allowance for deferred tax assets are unrelated to
the Company’s continuing operations.
CNO Financial Group
57
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):
(dollars in millions, except per-share amounts):
CNO Financial Group
58
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):
millions, except per-share amounts, and shares in thousands):
Information Related to Certain Non-GAAP Financial Measures
CNO Financial Group
59
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 to determine the measure. Management believes this non-GAAP financial measure is useful because it
removes the volatility that arises from changes in accumulated other comprehensive income (loss). Such volatility is often caused by changes in
the estimated fair value of our investment portfolio resulting from changes in general market interest rates rather than the business decisions
made by management.
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-GAAP financial measure is useful because it
removes the volatility that arises from changes in accumulated other comprehensive income (loss). Such volatility is often caused by changes in
the estimated fair value of our investment portfolio resulting from changes in general market interest rates rather than the business decisions
made by management.
A reconciliation from book value per share to book value per share, excluding accumulated other comprehensive income (loss) is as follows
(dollars in millions, except per share amounts):
(dollars in millions, except per share amounts):
CNO Financial Group
60
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, and increases or decreases
to our valuation allowance for deferred tax assets (“net operating income,” a non-GAAP financial measure) is important to evaluate the
performance of the Company and is a key measure commonly used in the life insurance industry. Management uses this measure to evaluate
performance because loss on extinguishment of debt, realized investment gains or losses, and increases to our valuation allowance for deferred
tax assets are unrelated to the Company’s continued operations.
to our valuation allowance for deferred tax assets (“net operating income,” a non-GAAP financial measure) is important to evaluate the
performance of the Company and is a key measure commonly used in the life insurance industry. Management uses this measure to evaluate
performance because loss on extinguishment of debt, realized investment gains or losses, and increases to our valuation allowance for deferred
tax assets are unrelated to the Company’s continued operations.
This non-GAAP financial measure also differs from return on equity because accumulated other comprehensive income (loss) has been
excluded from the value of equity used to determine this ratio. Management believes this non-GAAP financial measure is useful because it
removes the volatility that arises from changes in accumulated other comprehensive income (loss). Such volatility is often caused by changes in
the estimated fair value of our investment portfolio resulting from changes in general market interest rates rather than the business decisions
made by management.
excluded from the value of equity used to determine this ratio. Management believes this non-GAAP financial measure is useful because it
removes the volatility that arises from changes in accumulated other comprehensive income (loss). Such volatility is often caused by changes in
the estimated fair value of our investment portfolio resulting from changes in general market interest rates rather than the business decisions
made by management.
In addition, our equity includes the value of significant net operating loss carryforwards (included in income tax assets). In accordance with
GAAP, these assets are not discounted, and accordingly will not provide a return to shareholders (until after it is realized as a reduction to taxes
that would otherwise be paid). Management believes that excluding this value from the equity component of this measure enhances the
understanding of the effect these non-discounted assets have on operating returns and the comparability of these measures from period-to-
period. Operating return measures are used in measuring the performance of our business units and are used as a basis for incentive
compensation.
GAAP, these assets are not discounted, and accordingly will not provide a return to shareholders (until after it is realized as a reduction to taxes
that would otherwise be paid). Management believes that excluding this value from the equity component of this measure enhances the
understanding of the effect these non-discounted assets have on operating returns and the comparability of these measures from period-to-
period. Operating return measures are used in measuring the performance of our business units and are used as a basis for incentive
compensation.
All references to return on allocated capital measures assume a capital allocation based on a 275% targeted risk-based capital at the segment
level. Additionally, corporate debt has been allocated to the segments.
level. Additionally, corporate debt has been allocated to the segments.
CNO Financial Group
61
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 ended March 31, 2011, are as follows
(dollars in millions):
loss carryforwards (a non-GAAP financial measure); and (ii) return on equity, for the twelve months ended March 31, 2011, are as follows
(dollars in millions):
(Continued on next page)
CNO Financial Group
62
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 March 31, 2011, is as follows (dollars in millions):
(loss) for the twelve months ended March 31, 2011, is as follows (dollars in millions):
(Continued on next page)
CNO Financial Group
63
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 average common shareholders’ equity, is
as follows (dollars in millions):
comprehensive income (loss) and net operating loss carryforwards (a non-GAAP financial measure) to average common shareholders’ equity, is
as follows (dollars in millions):
(Continued on next page)
(Continued from previous page)
CNO Financial Group
64
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):
GAAP financial measure) to common shareholders’ equity, is as follows (dollars in millions):
(Continued from previous page)
CNO Financial Group
65
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 financial measure differs from the debt to capital ratio because accumulated other comprehensive (income) loss has been
excluded from the value of capital used to determine this measure. In addition, debt is defined as par value plus accrued interest and certain
other items. Management believes this non-GAAP financial measure is useful as the level of such ratio impacts certain provisions in our Senior
Secured Credit Agreement.
excluded from the value of capital used to determine this measure. In addition, debt is defined as par value plus accrued interest and certain
other items. Management believes this non-GAAP financial measure is useful as the level of such ratio impacts certain provisions in our Senior
Secured Credit Agreement.