CNO Financial Group, Inc. · NYSE:CNO
CNO Financial — Conseco — Q3 2008 Earnings Presentation
89 slides from CNO Financial's earnings presentation, November 2008
Slide 1: Third Quarter 2008 Financial and Operating Results
Third Quarter 2008 Financial and Operating Results For the period ended September 30, 2008 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: Q3 2008 Summary CNO
Q3 2008 Summary CNO All four segments profitable, with total Q3 2008 EBIT exceeding $100 million Improved results at Bankers • Key driver was improvement in LTC results $97.0 million quarterly sales for CNO, up 13% over Q3 2007 • Bankers sales up 16% • Colonial Penn sales up 6% • CIG sales up
Slide 5: Q3 2008 Summary CNO
Q3 2008 Summary CNO Investment portfolio earned yields meeting expectations and impairment losses consistent with industry trends and market conditions Net realized investment losses of $85.9 million (including $50 million of impairment losses) Accumulated other comprehensive loss increased fr
Slide 6: Why CNO is Different
Why CNO is Different Not ratings-dependent Virtually no variable business Focus on protection products Small average policy sizes No significant investments in exotic securities No dynamic hedging 6
Slide 7: Collected Premiums CNO
Collected Premiums CNO ($ millions) Collected Premiums-Trailing 4 Quarters Strong, consistent Q3 2008 Q2 2008 growth in Bankers Q3 2007 $4,315.1 Q4 2007 $4,314.1 Q1 2008 $4,322.3 $4,428.4 $4,527.6 and Colonial Penn Run-Off Moderating decline in CIG due to focus CIG on more profitable CP business
Slide 8: Q3 2008 Summary of Results
Q3 2008 Summary of Results CNO ($ millions, except per share amounts) Pre-Tax After Tax EPS Bankers Life $67.8 Colonial Penn 6.5 Conseco Insurance Group 36.1 LTC Run-off Block 2.9 Corporate and interest expense (20.4) Income before net realized investment losses* 92.9 $58.9 $0.32 ** Net realized inv
Slide 9: Q3 Earnings CNO Consolidated
Q3 Earnings CNO Consolidated Q3 2007 ($ millions) (Restated) Q1 2008 Q2 2008 Q3 2008 Bankers Life $67.5 $29.1 $34.6 $67.8 Colonial Penn 7.0 3.7 8.3 6.5 Conseco Insurance Group 18.2 23.3 30.0 36.1 Other Business in Run-Off (19.5) (1.3) 12.2 2.9 Corporate operations, excluding interest expense 2.3 (6.
Slide 10: Q3 2008 Results at Favorable End of Preliminary Ranges
Q3 2008 Results at Favorable End of Preliminary Ranges CNO Consolidated Operating results ($ in millions) Three Months Ended 9/30/08 Preliminary Final Release Release Total EBIT $95.0 - $105.0 $106.6 Corporate interest expense (13.7) (13.7) Income before net realized investment losses and taxes 81.3
Slide 11: Operating ROE
Operating ROE CNO Conseco’s goal is to improve Operating ROE to 11% in 2009 Operating ROE*, Trailing 4 Quarters Operating ROE (Before Litigation Settlement Charges, Annuity Coinsurance Transaction and Tax Valuation Allowance)**, Trailing 4 Quarters Q2 2008 Q3 2008 Q3 2008 3.6% 4.4% 2.2% Q3 2007 Q4
Slide 12: Operating EPS (Diluted)
Operating EPS (Diluted) CNO Operating EPS* Operating EPS (Before Litigation Settlement Charges, Annuity Coinsurance Transaction and Tax Valuation Allowance** Q3 2008 Q3 2008 $0.32 $0.32 Q2 2008 Q3 2007 Q2 2008 $0.18 $0.21 $0.18 Q1 2008 Q1 2008 $0.11 Q4 2007 $0.11 $0.11 Q3 2007 ($0.12) Q4 2007 ($0.26
Slide 13: Liquidity: Holding Company Sources and Uses of Funds
Liquidity: Holding Company Sources and Uses of Funds CNO ($ millions) Corporate liquidity • Available holding company liquidity in excess of $140 million at 9/30/08, including revolver • Repurchased $37 million of our convertible debentures during October 2008 for $16 million, resulting in $21 mil
Slide 14: Senior Health Separation Transaction Update
Senior Health Separation Transaction Update Changed CSHI’s name to Senior Health Insurance Company of Pennsylvania (Senior Health) At closing, transferring Senior Health to an independent trust (Senior Health Care Oversight Trust), into which the Transition Trust will merge following regulatory
Slide 15: Separation Transaction and Related Charges
Separation Transaction and Related Charges $ in millions Charges recognized in Q2 2008 Recognition of unrealized losses on investments to be transferred $205.7 Increase in deferred tax valuation allowance 298.0 Charges recognized in Q2 2008 503.7 Charges recognized in Q3 2008 Recognition of change i
Slide 16: Key Debt Covenants
Key Debt Covenants CNO ($ millions) Pro Forma Q4 2007 Q3 2008* Q3 2008** In compliance with all Debt/Capital Ratio financial covenants Covenant Maximum 30.0% 30.0% 30.0% Actual 21.0% 23.6% 28.2% Convertible repurchase improves debt-to-capital Interest Coverage ratio by 0.4% Covenant Minimum 2.00
Slide 17: Financial Indicators
Financial Indicators* CNO Book value per diluted share (excluding accumulated other comprehensive loss) • $20.79 at 9/30/08 vs $24.41 at 12/31/07 • Pro forma $18.09 at 9/30/08** Debt to total capital ratio (excluding accumulated other comprehensive loss) • 24% at 9/30/08 vs 21% at 12/31/07 • Pro
Slide 18: Consolidated RBC Ratio
Consolidated RBC Ratio* CNO Q3 2007 336% Q4 2007 Decrease due primarily to: 296% Q1 2008 282% Q2 2008 Q3 2008 271% • Mortgage experience 257% adjustment factor • Impairments • Statutory Senior Health LTC reserve pivoting • Business growth *Risk-Based Capital (“RBC”) requirements provide a tool for
Slide 19: Q3 Summary Bankers
Q3 Summary Bankers Earnings significantly improved over Q2 2008 Q3 2008 earnings affected by: • Decrease in interest-adjusted benefit ratio on LTC policies, driven by improvements in claims management practices • FAS 133 accounting treatment for embedded liability option in EIAs • Lower than exp
Slide 20: LTC: Strong Progress Achieved During Q3 2008
LTC: Strong Progress Achieved During Q3 2008 Bankers Significant efforts on multiple fronts, translating into improved results and outlook • In force pricing – completed Round Three rate increase submissions to the states • Claims management – protocol changes and process improvements yielding str
Slide 21: LTC: Re-Rate Actions
LTC: Re-Rate Actions Bankers Round Three (2008 round – policies issued prior to 2002) • Re-rate filings were completed by end of Q3 2008 • Filed $102.5 million of rate increases, on target • As of 11/3/08: approvals = $28.8 million (14 states), ahead of plan • As of 11/3/08: implementations = $27.
Slide 22: LTC: Claims/Underwriting/Products
LTC: Claims/Underwriting/Products Bankers Claims management • Organizational re-alignment completed, resulting in subgroups of similar size, span of control and risk management responsibility • Best-in-class new protocols have been introduced and are being applied by all claims personnel • Importa
Slide 23: Comparing LTC: Closed Block vs BLC
Comparing LTC: Closed Block vs BLC Closed Block BLC Active Lives 180,000 430,000 Active Claims 12,000 12,000 Claims Paid in 2007 $404 million $313 million Premium (2007) $310 million $620 million Distribution Brokers Career agents % of Policies with “0 Day Elimination Period” 75% 15% % of Policies w
Slide 24: Annuities
Annuities Bankers EIA Surrenders (annualized quarterly rate) No significant change in Q1 2007 Q2 2007 11.5% 11.2% Q3 2007 Q4 2006 10.8% Q4 2007 surrender activity this year: Q3 2006 9.9% 10.3% Q1 2008 Q2 2008 Q3 2008 9.8% 8.5% 9.0% • Q3 2008 surrenders are slightly 8.6% higher than Q1 and Q2 2008,
Slide 25: Q3 2008 Sales and Distribution Results
Q3 2008 Sales and Distribution Results Bankers Total sales up 16% vs Q3 2007; up 6% excluding PFFS • Strong sales of annuities (+29%) and Medicare Supplement (+3%), partially offset by lower life (-5%) and LTC sales (-2%) Agent productivity and agent force growth remain strong • 4,782 agents at
Slide 26: NAP Growth
NAP Growth Bankers ($ millions) Quarterly NAP-Excluding PFFS Continued strong sales Q3 2007 $57.5 Q4 2007 $60.9 Q1 2008 Q2 2008 $59.8 Q3 2008 $61.2 $55.6 momentum, driven by annuities Market conditions moving customers to products with safe returns Non-PFFS NAP-Quarterly: $57.5 $60.9 $55.6 $59.8
Slide 27: Q3 Earnings Bankers
Q3 Earnings Bankers ($ millions) Q3 2007 (Restated) Q1 2008 Q2 2008 Q3 2008 Insurance policy income $473.6 $497.0 $543.4 $537.7 Net investment income 144.2 129.3 135.2 138.3 Fee revenue and other income 3.8 1.6 2.1 3.1 Total revenues 621.6 627.9 680.7 679.1 Insurance policy benefits 404.9 434.9 497.
Slide 28: Q3 Summary Colonial Penn
Q3 Summary Colonial Penn Q3 2008 NAP of $12 million, 6% above Q3 2007 • 2008 YTD NAP of $43.5 million, up 32% over prior year Earnings down 7% from Q3 2007 • Higher life margins arising from recapture of reinsurance treaty in Q4 2007 and sales expansion • More than offset by a $1.3 million adjus
Slide 29: Q3 Earnings Colonial Penn
Q3 Earnings Colonial Penn ($ millions) Q3 2007 Q1 2008 Q2 2008 Q3 2008 Insurance policy income $32.5 $44.4 $47.5 $46.4 Net investment income 9.4 9.2 10.1 10.1 Fee revenue and other income 0.2 0.3 0.5 0.5 Total revenues 42.1 53.9 58.1 57.0 Insurance policy benefits 26.3 35.0 35.5 33.9 Amounts added t
Slide 30: Q3 Summary CIG
Q3 Summary CIG Q3 2008 NAP of $19 million, 5% above Q3 2007 • Strong sales gains in specified disease, up 25% from Q3 2007 • Decreases in Medicare supplement and annuities, consistent with CIG’s focus on more profitable business Q3 2008 earnings up 20% vs Q2 2008: • Improved mortality in interes
Slide 31: NAP: Q3 2007 vs Q3 2008
NAP: Q3 2007 vs Q3 2008 CIG ($ millions) $12.8 Q3 2007 Q3 2008 $10.3 $4.5 $2.2 $2.2 $1.9 $1.8 $1.3 Life Annuities Med Sup Spec Dis 31
Slide 32: Q3 Earnings CIG
Q3 Earnings CIG ($ millions) Q3 2007 (Restated) Q1 2008 Q2 2008 Q3 2008 Insurance policy income $238.7 $234.3 $229.7 $228.5 Net investment income 181.2 129.3 131.3 126.8 Fee revenue and other income 0.1 0.7 0.4 0.1 Total revenues 420.0 364.3 361.4 355.4 Insurance policy benefits 200.7 196.6 195.8 18
Slide 33: Q3 Summary LTC Closed Block
Q3 Summary LTC Closed Block Progressing plan to transfer Senior Health to independent trust Fifth consecutive stable quarter Q3 results reflect • Continued reserve adequacy • Impact of turnaround program 33
Slide 34: Q3 Earnings LTC Closed Block
Q3 Earnings LTC Closed Block ($ millions) Q3 2007 (Restated) Q1 2008 Q2 2008 Q3 2008 Insurance policy income $77.2 $75.5 $75.5 $74.2 Net investment income 48.8 50.5 51.6 53.9 Fee revenue and other income 0.1 0.1 0.1 0.0 Total revenues 126.1 126.1 127.2 128.1 Insurance policy benefits 122.3 102.6 93.
Slide 35: Investment Quality: Fixed Maturities
Investment Quality: Fixed Maturities* CNO Actively Managed Fixed Maturities by Rating at Investment grade securities 9/30/08 (Market Value) BB+ and below represent 94% of total BBB- 6% AAA portfolio* 9% 24% Limited new money allocation to below- BBB 11% investment grade securities Pressure on
Slide 36: Q3 2008 Net Realized Investment Losses
Q3 2008 Net Realized Investment Losses CNO ($ millions) Net losses on sales $(45.8) Losses due to the recognition of other-than-temporary impairments (50.0) Subtotal before amortization adjustment (95.8) Amortization adjustment to DAC and PVP 9.9 Net realized investment losses $(85.9) 36
Slide 37: Q3 2008 Update: Lehman/Washington Mutual/AIG
Q3 2008 Update: Lehman/Washington Mutual/AIG CNO $ in millions Other-than- Total 9/30/08 Holdings Loss on Temporary Investment Sales Impairments Loss Par Book Lehman Brothers $(25.7) $(9.9) $(35.6) $10.4 $0.5 Washington Mutual (14.3) (10.8) (25.1) $21.6 $10.8 AIG (6.1) (2.3) (8.4) $2.8 $0.5 (69.1) A
Slide 38: Net Unrealized Losses: Fixed Maturity Securities
Net Unrealized Losses: Fixed Maturity Securities CNO ($ in millions) 12/31/2007 3/31/2008 6/30/2008 9/30/2008 $20,992.7 $21,166.3 $21,336.8 $21,040.4 Fixed maturity securities Net unrealized losses $2,114.5 ($ and % of fixed maturity $481.8 $1,007.0 $1,188.4 10.0% securities) 2.3% 4.8% 5.6% 38
Slide 39: Structured Securities at 9/30/08
Structured Securities at 9/30/08 CNO (Market value in millions) Structured Securities represent 24% of total actively Other managed fixed maturity $68.4 Commercial securities Planned amortization class, target 1.5% mortgage-backed amortization class, and accretion- directed bonds securities • 90%
Slide 40: Sub-Prime Home Equity ABS
Sub-Prime Home Equity ABS* CNO Exposure by Vintage Year (Book Value in millions) 12/31/2007 3/31/2008 6/30/2008 9/30/2008 $88.2 $80.7 $65.5 $62.9 $36.5 $24.6 $15.8 $15.2 $16.0 $11.0 $10.3 $11.8 $10.0 $10.0 $10.0 $10.0 $0.0 $0.0 $0.0 $0.0 2003 2004 2005 2006 2007 Exposure reduced by 37% since 12/31
Slide 41: Sub-Prime Home Equity ABS at 9/30/08
Sub-Prime Home Equity ABS* at 9/30/08 CNO Market Book % of Avg. Avg. Avg. 60+ % of Rating Value (mil.) Value (mil.) Subprime* FICO Support Delinq. Portfolio** AAA $27.1 $35.2 36.9% 641 30.4% 14.2% 0.12% AA $27.1 $34.2 36.9% 648 23.4% 8.0% 0.12% A $19.3 $25.6 26.2% 683 20.8% 8.8% 0.09% Total $73.5 $9
Slide 42: Alt-A Exposure Summary at 9/30/08
Alt-A Exposure Summary* at 9/30/08 CNO Exposure by Rating Category (in millions) $579 Market Value $453 Book Value $584 $449 $4 $5 $0 $0 $0 $0 $0 $0 AAA AA A BBB BB *Includes exposure held in our trading portfolios. 42
Slide 43: CMBS Exposure Summary at 9/30/08
CMBS Exposure Summary* at 9/30/08 CNO Exposure by Rating Category (in millions) $593 $552 Market Value $800 Book Value $930 $141 $104 $80 $91 $55 $68 $22 $24 AAA AA A BBB BB *Includes exposure held in our trading portfolios. 43
Slide 44: CNO Summary
CNO Summary Separation of Senior Health from Conseco Continued strong growth in new business • Bankers Life – continuing to grow at about 10% • Colonial Penn – growth in excess of 20% • CIG – producing more economic value from refocused sales efforts Improved earnings • Bankers earnings back a
Slide 45: Questions and Answers
S CONSECO. Questions and Answers 45
Slide 46: Appendix
S CONSECO. Appendix 46
Slide 47: Book Value Per Diluted Share
Book Value Per Diluted Share* CNO Decrease driven by net loss Q3 2007 Q4 2007 Q1 2008 in Q3 2008 $24.68 $24.41 $24.40 Q2 2008 Q3 2008 $21.76 $20.79 *Book value excludes accumulated other comprehensive income (loss). Shares outstanding assumes: (1) conversion of convertible securities; and (2) the
Slide 48: Ratio of Debt to Total Capital
Ratio of Debt to Total Capital* CNO Increase primarily driven by net loss in Q3 2008 Q2 2008 Q3 2008 Q3 2007 Q4 2007 Q1 2008 22.8% 23.6% 20.6% 20.9% 20.9% *Excludes accumulated other comprehensive income (loss). See Appendix for corresponding GAAP measure. 48
Slide 49: Net Investment Income
Net Investment Income CNO ($ millions) General Account Investment Income Yield up from Q3 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 $392.6 $364.6 $353.7 $356.1 $359.5 Net investment income (loss) from the prepayment of securities: $0.6 $5.0 $1.5 $1.7 $(1.1) Yield: 5.87% 5.94% 5.82% 5.82% 5.91%
Slide 50: Expenses
Expenses CNO ($ millions) Adjusted Operating Expenses* Back-office consolidation when Q3 2007 Q4 2007 $107.5 Q1 2008 $105.9 Q2 2008 Q3 2008 $105.3 $102.1 completed expected to produce $99.2 run-rate savings of $25 million annually by YE 2008 • Approximately $11 million in savings realized in 2007;
Slide 51: Equity Indexed Products
Equity Indexed Products CNO CNO substantially hedges its current-year exposure to equity volatility (with future periods subject to product repricing) Hedge positions periodically adjusted for terminations • Terminations tend to result in modestly long position • Financial impact based on market
Slide 52: Segment Performance Bankers
Segment Performance Bankers ($ millions) Pre-Tax Operating Income* Higher earnings driven by: • Higher margins as a result of Q3 2007 $67.5 Q3 2008 $67.8 measures implemented to address Q4 2007 $58.3 higher than expected LTC claims Offset by: Q1 2008 Q2 2008 $34.6 $29.1 • FAS 133 volatility • Lo
Slide 53: Premiums – Medicare Supplement
Premiums – Medicare Supplement Bankers Medicare Supplement – First-Year Premiums (in millions) Q4 2007 $21.0 Q2 2008 Q3 2008 Q3 2008 vs Q3 2007: Q3 2007 Q1 2008 $19.3 $19.4 $19.8 $19.1 • First-year premiums and NAP up 3% Med. Supp. First-Year Prems.-Tr. 4 Qtrs: $86.8 $82.5 $79.4 $78.8 $79.3 Med. S
Slide 54: Premiums – PDP/PFFS
Premiums – PDP/PFFS Bankers (in millions) PDP/PFFS – First-Year Premiums Q3 2007 to Q3 2008 growth Q2 2008 $116.1 driven by continued growth in in- force policies and addition of one Q4 2007 Q3 2008 new group case Q3 2007 $86.0 $86.2 $78.5 Q1 2008 Q1 2008 to Q2 2008 growth $70.4 reflects start o
Slide 55: Premiums – Long-Term Care
Premiums – Long-Term Care Bankers ($ millions) Long-Term Care – First-Year Premiums Quarterly first-year premium tracks decline in NAP Q3 2007 Q4 2007 NAP decline attributable to $11.7 Q1 2008 Q2 2008 Q3 2008 $11.5 $11.0 $10.6 $10.8 three main factors: • Overall industry sales decline • Agent fo
Slide 56: Premiums – Life Insurance
Premiums – Life Insurance Bankers Life – First-Year Premiums ($ millions) Fluctuations in first-year Q3 2007 Q4 2007 Q2 2008 $22.5 premiums primarily reflect $21.2 $21.3 Q1 2008 Q3 2008 $19.5 variance in sales of single- $18.5 premium policies SPWL $9.1 $9.3 $9.4 $7.5 $7.0 Non-SPWL premiums flat
Slide 57: Premiums – Annuity
Premiums – Annuity Bankers Annuity – First-Year Premiums ($ millions) Q3 2008 $316.0 Fixed annuities have become Q3 2007 Q2 2008 $256.8 $250.5 more attractive due to stock Q4 2007 $221.2 Q1 2008 $228.0 market volatility First-Year Prems.-Tr. 4 Qtrs: $909.0 $882.7 $899.3 $956.5 $1,022.0 Total Premi
Slide 58: Benefit Ratio – Medicare Supplement
Benefit Ratio* – Medicare Supplement Bankers Q3 2008 ratio negatively Q3 2007 69.4% Q4 2007 67.6% Q1 2008 Q2 2008 71.3% Q3 2008 72.5% impacted by: 64.6% Premium refund adjustments Higher incurred claims, particularly in skilled nursing Trailing 4 Quarter Avg.: 66.6% 67.2% 67.3% 68.2% 69.0% *We
Slide 59: Benefit Ratio – PDP
Benefit Ratio* – PDP Bankers PDP ratio continues to trend as Q1 2008 103.3% Q2 2008 expected, factoring in seasonal 95.2% Q3 2008 fluctuations and settlement of Q3 2007 75.3% 80.9% prior contract year Q4 2007 53.0% *We calculate benefit ratios by dividing insurance policy benefits by insurance pol
Slide 60: Benefit Ratio – PFFS Individual Business
Benefit Ratio* – PFFS Individual Business Bankers Q3 2008 reflects catch-up on Q2 2008 96.1% Q3 2008 98.1% prior period claims processing Q3 2007 Q4 2007 82.6% Q1 2008 84.6% 80.8% Q2 2008 reflects IBNR adjustment *We calculate benefit ratios by dividing insurance policy benefits by insurance pol
Slide 61: Benefit Ratio – PFFS Group Business
Benefit Ratio* – PFFS Group Business Bankers Q1 2008 Q3 2008 Lower expense levels allow Q3 2007 90.9% Q4 2007 91.8% 98.7% Q2 2008 92.1% 95.3% group PFFS to operate at a higher benefit ratio than individual business, with similar margin expectations *We calculate benefit ratios by dividing insuranc
Slide 62: Interest-Adjusted Benefit Ratio – Long Term Care
Interest-Adjusted Benefit Ratio* – Long Term Care Bankers Q3 2008 positively impacted by: • Measures implemented in Q2 2008 to address higher than expected LTC claim frequency and Q3 2007 Q1 2008 Q2 2008 Q4 2007 79.0% 81.4% stabilization of excess termination 75.2% 71.2% Q3 2008 activity in the fi
Slide 63: Segment Performance Colonial Penn
Segment Performance Colonial Penn ($ millions) Pre-Tax Operating Income* Q3 2007 to Q3 2008 earnings Q2 2008 $8.3 • Declined due to higher life claims Q3 2007 $7.0 Q3 2008 $6.5 in 2008, offset by growth from • Q4 2007 recapture Q1 2008 • Organic growth initiatives $3.7 Q4 2007 -$0.2 PTOI-Trailing
Slide 64: Premiums – Life Insurance Colonial Penn
Premiums – Life Insurance Colonial Penn Life – First-Year Premiums ($ millions) Q2 2008 Q3 2008 Q1 2008 $8.9 $8.8 $8.4 Continued strong sales growth Q3 2007 Q4 2007 $7.6 $7.4 Trailing four quarters data: • NAP grew 20% • First-year premium grew 25% First-Year Prems.-Tr. 4 Qtrs: $27.0 $28.7 $30.4
Slide 65: Segment Performance CIG
Segment Performance CIG ($ millions) Pre-Tax Operating Income* Improving life margins Lower expenses, which includes a Q3 2008 $36.1 writeoff to software in Q3 2007 Q2 2008 $30.0 Q1 2008 Partially offset by loss of annuity Q3 2007 $23.3 $18.2 profits from block coinsured in Q4 2007 October 200
Slide 66: Premiums - Medicare Supplement CIG
Premiums - Medicare Supplement CIG ($ millions) Medicare Supplement – First-Year Premiums NAP down 5% from Q3 2007: • We continue to focus on the Q3 2007 profitability of this business rather $4.2 Q4 2007 than increased sales $3.4 Q1 2008 $2.8 Q2 2008 Q3 2008 $2.3 $2.1 First-Year Prems.-Tr. 4 Qtrs
Slide 67: Premiums – Specified Disease
Premiums – Specified Disease CIG ($ millions) Specified Disease – First-Year Premiums Q2 2008 Q3 2008 Q1 2008 $9.8 $9.7 NAP up 25% from Q3 2007: Q4 2007 $8.7 $9.4 Q3 2007 • New products $7.7 • Increased PMA focus on specified disease products • Recruitment of Health IMOs First-Year Prems.-Tr. 4 Qt
Slide 68: Premiums – Annuity CIG
Premiums – Annuity CIG ($ millions) Annuity – First-Year Premiums Q3 2007 Collections down 65% from $73.2 Q3 2007: Q4 2007 $56.6 • Discontinuance of products due Q1 2008 to an annuity coinsurance $39.2 Q2 2008 $34.4 transaction Q3 2008 $25.1 • Focus on profitable products First-Year Prems.-Tr. 4 Q
Slide 69: Benefit Ratio – Medicare Supplement CIG
Benefit Ratio* – Medicare Supplement CIG Q3 2007 Q2 2008 Q3 2008 Q4 2007 Recognized higher incurred 68.6% Q1 2008 71.9% 73.0% 66.0% 65.8% claims in Q3 2008 Trailing 4 Quarter Avg.: 67.1% 67.6% 67.4% 68.0% 69.1% *We calculate benefit ratios by dividing insurance policy benefits by insurance policy
Slide 70: Interest-Adjusted Benefit Ratio – Specified Disease
Interest-Adjusted Benefit Ratio* – Specified Disease CIG Change from Q3 2007 primarily driven by slight decrease in Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 49.1% incurred claims 46.5% 48.1% 46.7% 48.5% Trailing 4 Quarter Avg.: 43.2% 44.7% 46.0% 47.6% 47.4% Qtrly. non-int. adjusted: 81.9% 80.6% 81.
Slide 71: Segment Performance LTC Closed Block
Segment Performance LTC Closed Block ($ millions) Pre-Tax Operating Income* Q2 2008 Steady revenue trend $12.2 Continued reserve stability Q3 2008 $2.9 Impact from improvement initiatives Q1 2008 -$1.3 Q4 2007 -$10.0 Q3 2007 -$19.5 PTOI-Trailing 4 Quarters: $(221.0) $(185.9) $(161.1) $(18.6) $
Slide 72: Balance Sheet Detail LTC Closed Block
Balance Sheet Detail LTC Closed Block ($ millions) Insurance Liabilities and Intangible Assets, Net of Reinsurance Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Reserve for Future Benefits $2,402.3 $2,392.7 $2,394.4 $2,373.6 $2,411.9 Claim Reserve 954.3 962.1 957.2 960.8 989.2 Insurance Acquisition Costs
Slide 73: Benefit Detail LTC Closed Block
Benefit Detail LTC Closed Block ($ millions) Total Benefits Fifth consecutive stable Q3 2007 $122.3 Q4 2007 quarter; continued reserve $113.3 Q1 2008 Q3 2008 $105.1 $102.6 Q2 2008 adequacy $93.6 Incurred Claims $112.9 $119.8 $100.9 $114.4 $115.1 Increase in Reserves for Future Benefits $9.4 $(6.4)
Slide 74: Interest-Adjusted Benefit Ratio LTC Closed Block
Interest-Adjusted Benefit Ratio* LTC Closed Block Q2 2007 232.6% Fifth consecutive stable quarter Q2 2007 benefit ratio reflects $110 million Q3 2007 96.2% Q4 2007 claim reserve 82.2% Q1 2008 Q3 2008 69.8% Q2 2008 strengthening 56.5% 69.8% Trailing 4 Quarter Avg.: 134.1% 138.8% 127.5% 120.8% 76.
Slide 75: Verified Incurred Development LTC Closed Block
Verified Incurred Development* LTC Closed Block Developed ($ millions) Deficiencies in Periods Prior to 2004 2004 2005 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Reported Claims $0.0 $370.8 $396.0 $433.3 $119.7 $212.0 $100.7 $104.7 $89.1 $102.3 $105.2 Prior Pd. Dev. 0 (44.2) (58.9)
Slide 76: Operating Data LTC Closed Block
Operating Data LTC Closed Block Q3 2006 Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Claims Paid (mils.) $96.1 $81.6 $102.0 $96.8 $97.7 $104.9 $93.6 $99.2 $96.3 Open Claimant Counts 12,228 12,048 11,870 12,424 12,121 12,338 11,783 12,237 11,722 In Force Policy Counts 190,134 187,1
Slide 77: Premium Re-rates (as of 10/30/08) LTC Closed Block
Premium Re-rates (as of 10/30/08) LTC Closed Block Round 1 results - exceeded each goal: • Submitted: $64.0 million (115% of goal) • Approved: $47.0 million (113% of goal) • Implemented: $46.7 million (112% of goal) • Financial impact: $39.2 million (112% of goal) Round 2 results – on track to a
Slide 78: 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 79: 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 the net operating income, excluding: (i) Q2 2006 charge related to the litigation settlement and refinements to such estimates recognized in subsequent periods; (ii) a Q3 2007 char
Slide 80: Information Related to Certain Non-GAAP Financial Measures
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 book value us
Slide 81: Information Related to Certain Non-GAAP Financial Measures
Information Related to Certain Non-GAAP Financial Measures A reconciliation from book value per diluted share to book value per diluted share, excluding accumulated other comprehensive income (loss) is as follows (dollars in millions, except per share amounts): Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Total sh
Slide 82: 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 net realized gains or losses and losses related to the proposed transfer of Senior Health to an independent trust (“net operating income”, a non-GAAP financial m
Slide 83: Information Related to Certain Non-GAAP Financial Measures
Information Related to Certain Non-GAAP Financial Measures A reconciliation of return on common equity to operating return (less: (i) Q2 2006 charge related to the litigation settlement and refinements to such estimates recognized in subsequent periods; (ii) a Q3 2007 charge related to an annuity co
Slide 84: Information Related to Certain Non-GAAP Financial Measures
Information Related to Certain Non-GAAP Financial Measures (continued from previous page) Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Average common shareholders' equity 4,320.8 4,260.7 4,087.8 3,660.9 3,043.1 Average common shareholders' equity, excluding accumulated other comprehensive income (loss) and net ope
Slide 85: 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 income (loss) and consolidated net income (loss) for the nine months ended September 30, 2008, is as follows (dollars in millions): Other Busin
Slide 86: Information Related to Certain Non-GAAP Financial Measures
Information Related to Certain Non-GAAP Financial Measures A reconciliation of common shareholders’ equity, 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):
Slide 87: Information Related to Certain Non-GAAP Financial Measures
Information Related to Certain Non-GAAP Financial Measures A reconciliation of average common shareholders’ equity, excluding accumulated other comprehensive income (loss) and net operating loss carryforwards (a non-GAAP financial measure) to average common shareholders’ equity at September 30, 2008
Slide 88: Information Related to Certain Non-GAAP Financial Measures
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 of capital
Slide 89: Information Related to Certain Non-GAAP Financial Measures
Information Related to Certain Non-GAAP Financial Measures A reconciliation of the debt to capital ratio to debt to capital, excluding accumulated other comprehensive loss is as follows (dollars in millions): Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Corporate notes payable $ 1,195.7 $ 1,193.7 $ 1,191.7 $ 1,189