CNO Financial Group, Inc. · NYSE:CNO
CNO Financial — Conseco — Q3 2006 Earnings Presentation
52 slides from CNO Financial's earnings presentation, Nov 2, 2006
Slide 1: Third Quarter 2006 Financial and Operating Results
Third Quarter 2006 Financial and Operating Results For the period ended September 30, 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 this press release relative to markets for Conseco’s products and trends in Conseco’s operations or financial results, as well as other statements,
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: A disappointing quarter, with poor experience in the Runoff LTC
A disappointing quarter, with poor experience in the Runoff LTC book of business dragging down results Earnings from Bankers Life were strong, with steady growth in sales at both Bankers Life and Colonial Penn Earnings from Conseco Insurance Group (CIG) were down, while new business volumes showed s
Slide 5: Business Highlights
Business Highlights CNO New business volumes* (NAP – in millions) A.M. Best ratings confirmed, long-term targets for metrics for an upgrade laid out New talent joining the firm – new health actuaries, claims and LTC specialists *New business volumes are measured by new annualized premium, which incl
Slide 6: Collected Premium Growth
Collected Premium Growth CNO ($ millions) $972.0 $1,156.5 CIG Bankers Run-Off Growth in all of our core businesses Consolidated premiums up $185 million, or 19% from Q3 2005
Slide 7: Operating EPS (Diluted)
Operating EPS (Diluted) CNO Operating EPS, Before Q2 2006 Charge** **Operating earnings per share, before Q2 2006 charge related to the tentative litigation settlement. See Appendix for corresponding GAAP measure. Operating EPS* *Operating earnings per share exclude net realized investment gains (lo
Slide 8: Operating ROE
Operating ROE CNO Operating ROE*, Trailing 4 Quarters Operating ROE (excl. Q2 2006 charge and NOLs)**, Trailing 4 Quarters *Operating return excludes net realized investment gains (losses). Equity excludes accumulated other comprehensive income (loss). See Appendix for corresponding GAAP measure. **
Slide 9: Q3 Earnings
Q3 Earnings CNO *Management believes that an analysis of earnings before net realized investment gains (losses) and corporate interest and taxes (“EBIT,” a non-GAAP financial measure) provides an alternative measure to compare the operating results of the company quarter-over-quarter because it excl
Slide 10: Book Value Per Diluted Share
Book Value Per Diluted Share * CNO *Book value excludes accumulated other comprehensive income (loss). Shares outstanding assumes: (1) conversion of convertible securities; and (2) the exercise of outstanding stock options and vesting of restricted stock (each calculated using the treasury stock met
Slide 11: Debt to Total Capital Ratio
CNO Debt to Total Capital Ratio * Ratio will increase in Q4 2006 for the refinancing we completed in October *Excludes accumulated other comprehensive income (loss). See Appendix for corresponding GAAP measure. Q3 2006 Pro Forma reflects the refinancing of our credit facility in October 2006.
Slide 12: Consolidated RBC Ratio
Consolidated RBC Ratio* CNO RBC ratios remain strong in Q3 Contributions of the proceeds from October refinancing will increase ratio in Q4 2006 Q3 2006 is estimated; statutory results have not been finalized. Pro Forma Q3 2006 is estimated, based on use of proceeds from the debt refinancing complet
Slide 13: Net Investment Income
Net Investment Income CNO ($ millions) Yields have improved in 2006 Q3 2005 yield reflects significant prepayment income, adding approximately 23 basis points to yield Net investment income from the prepayment of securities: $14.0 $5.2 $1.2 $5.3 $0.5 General Account Investment Income, Excluding Corp
Slide 14: High-Quality Assets
High-Quality Assets CNO Portfolio quality remains high Less than 5% of portfolio is below investment grade Actively Managed Fixed Maturities by Rating at 9/30/06 (Market Value) Q3 2006 95% Q2 2006 95% Q1 2006 95% Q4 2005 96% Q3 2005 97% % of Bonds which are Investment Grade:
Slide 15: Aggregate Health Benefit Ratio
Aggregate Health Benefit Ratio* CNO Loss ratios in our core businesses remain stable Disappointing results in non- core long-term care run-off block caused ratios to increase Aggregate Health Benefit Ratio – By Quarter Core (BLC & CIG) Business *We calculate benefit ratios by dividing insurance poli
Slide 16: Expenses
Expenses CNO ($ millions) Gross Operating Expenses*, Trailing 4 Quarters *Gross operating expenses before capitalization of cost of policies produced, capitalization of software development costs and other adjustments. Costs related to the tentative litigation settlement are not included in our gros
Slide 17: Segment Performance (CIG)
Segment Performance CIG *Operating earnings exclude net realized gains (losses). Q2 2006 excludes tentative litigation settlement. See Appendix for corresponding GAAP measure of our consolidated results of operations. Continued emphasis on building out distribution to offset the normal erosion of th
Slide 18: Benefit Ratio – Medicare Supplement (CIG)
Benefit Ratio* – Medicare Supplement CIG Benefit ratios in 2005 and first half of 2006 benefited from release of policy benefit reserves related to increase in policyholder lapses Persistency improved in Q3 2006; we expected the benefit ratio to increase, consistent with our expectations for lower l
Slide 19: Interest-Adjusted Benefit Ratio – Specified Disease
Interest-Adjusted Benefit Ratio* – Specified Disease CIG Benefit ratio in Q4 2005 and first half of 2006 reflected higher than expected incurred claims, driven primarily by continued incidence of paid claims with old initial incurred dates Paid claims in Q3 2006 returned to more normalized level Tra
Slide 20: Premiums – Medicare Supplement (CIG)
Premiums - Medicare Supplement CIG ($ millions) 59% increase in first-year premiums over Q2 2005 NAP for 2006 to date well ahead of last year First-Year Prems.-Tr. 4 Qtrs: $14.1 $15.8 $21.0 $25.6 $28.0 Total Premiums-Quarterly: $68.5 $68.4 $65.9 $61.9 $54.6 Medicare Supplement – First-Year Premiums
Slide 21: Premiums – Specified Disease
Premiums – Specified Disease CIG ($ millions) Successful recruiting results at PMA (wholly owned distribution subsidiary) First-Year Prems.-Tr. 4 Qtrs: $31.1 $30.6 $29.7 $28.8 $28.4 Total Premiums-Quarterly: $88.5 $88.5 $91.4 $88.8 $88.1 Specified Disease – First-Year Premiums
Slide 22: Premiums – Life Insurance (CIG)
Premiums – Life Insurance CIG ($ millions) Line being revitalized New channel leader hired in May Three field VPs added YTD improvements in: IMO appointments (267%) Submitted apps (6%) Submitted premium (7%) NAP (11%) First-Year Prems.-Tr. 4 Qtrs: $10.1 $8.2 $7.1 $6.7 $6.7 Total Premiums-Quarterly:
Slide 23: Premiums – Annuity (CIG)
Premiums – Annuity CIG ($ millions) Continued rapid growth Traditional IMO channel strong Significant contribution from Legacy Marketing Group relationship Actuarial Development Services partnership launches first product First-Year Prems.-Tr. 4 Qtrs: $94.2 $141.9 $153.3 $218.6 $358.1 Total Premiums
Slide 24: Segment Summary (CIG)
Segment Summary CIG Continued focus on: Hiring the right people Working with distribution to develop the right products Building out Worksite Improving our execution
Slide 25: Segment Performance (Bankers)
Segment Performance Bankers *Operating earnings exclude net realized gains (losses). See Appendix for corresponding GAAP measure of our consolidated results of operations. Q3 2005-Q3 2006 earnings improvement driven by: Improving Medicare Supplement benefit ratio Higher investment income Lower opera
Slide 26: Benefit Ratio – Medicare Supplement (Bankers)
Benefit Ratio* – Medicare Supplement Bankers Improving benefit ratio reflects: Pricing action taken earlier this year Claim redundancies for 2005 and prior incurred claims Improving loss ratio estimate for 2006 incurred claims Trailing 4 Quarter Avg.: 71.8% 71.6% 70.5% 69.3% 67.8% *We calculate bene
Slide 27: Interest-Adjusted Benefit Ratio – Long Term Care
Interest-Adjusted Benefit Ratio* – Long Term Care Bankers *We calculate interest-adjusted benefit ratios by dividing insurance policy benefits less interest income on the accumulated assets backing the insurance liabilities by insurance policy income. Interest-adjusted benefit ratio relatively flat
Slide 28: Segment Summary (Bankers)
Segment Summary Bankers Improving fundamentals in the business Lower Medicare Supplement benefit ratio Strong execution of LTC inforce re-rate actions First-year collected premium Q3 2006 - $364 million, up 26% over Q3 2005 YTD 2006 - $1,004 million, up 17% over YTD 2005
Slide 29: Premiums – Medicare Supplement/PDP
Premiums – Medicare Supplement/PDP Bankers ($ millions) Strong sales First-year premiums up 27% from Q3 2005 Trailing 4 Qtrs premiums up 30% from Q3 2005 Med. Supp. First-Year Prems.-Tr. 4 Qtrs: $71.7 $74.1 $81.2 $88.1 $93.1 Med. Supp. Total Premiums-Quarterly: $159.1 $162.5 $171.2 $159.5 $149.4 Med
Slide 30: Premiums – Long-Term Care
Premiums – Long-Term Care Bankers ($ millions) Steady decline in premiums over the past five quarters New sales are meeting our pricing objectives First-Year Prems.-Tr. 4 Qtrs: $66.8 $65.4 $62.5 $58.5 $54.6 Total Premiums-Quarterly: $140.8 $141.1 $145.7 $151.5 $145.0 Long-Term Care – First-Year Prem
Slide 31: Premiums – Life Insurance (Bankers)
Premiums – Life Insurance Bankers ($ millions) Growth driven by: Continued focus on new agent training Expanded advanced life insurance training for veteran agents All product lines up: Universal Life, Senior Whole Life and Single Premium Whole Life First-Year Prems.-Tr. 4 Qtrs: $61.4 $74.1 $84.2 $8
Slide 32: Premiums – Annuity (Bankers)
Premiums – Annuity Bankers ($ millions) Growth driven principally by: Increased sales of equity-indexed annuities First-Year Prems.-Tr. 4 Qtrs: $972.8 $948.3 $960.5 $960.1 $1,010.7 Total Premiums-Quarterly: $226.7 $264.1 $233.4 $238.3 $278.2 Annuity – First-Year Premiums
Slide 33: Premiums – Life Insurance (Colonial Penn)
Premiums – Life Insurance Colonial Penn ($ millions) Growth driven by: Increased but focused ad spend Expanding breadth of lead sources Improving direct mail productivity Improving telemarketing productivity First-Year Prems.-Tr. 4 Qtrs: $18.9 $19.4 $20.2 $21.2 $22.0 Total Premiums-Quarterly: $22.8
Slide 34: Interest-Adjusted Benefit Ratio – LTC Closed Block
Interest-Adjusted Benefit Ratio* – LTC Closed Block Ratio has risen for the past two quarters Persistency exceeded expectation in Q3 Inventory-adjusted paid claims exceeded historical average in Q2 and Q3 Inventory-adjusted paid claims fell slightly in Q3 Trailing 4 Quarter Avg.: 49.9% 49.2% 48.4% 5
Slide 35: Progress continues on second quarter initiatives
Progress continues on second quarter initiatives Premium re-rates Talent and organizational design Technology Claims management Program for Improvement Run-Off Block
Slide 36: Premium re-rates
Premium re-rates 357 rate filings are involved, seeking three successive years of rate increase Expected annualized Net Revenue Enhancement (NRE) estimated at $35 million from the first round of rate increases $8 million approved to date (22%); targeting one-third by end of Program for Improvement R
Slide 37: Talent and organizational design
Talent and organizational design Three significant additions to leadership in last quarter Dick Garner – product management – 20+ years of LTC experience Brian Wegner – operations management – 7 years of LTC experience David Vega – claims management – 7 years of LTC experience Increased specializati
Slide 38: Technology
Technology Workflow system on line this month Improved policy/benefit repository (2007) Program for Improvement Run-Off Block
Slide 39: Claims management
Claims management Hired LifePlans for claims leakage study Hired major actuarial firm for claims review and other improvements Program for Improvement Run-Off Block
Slide 40: Summary
Summary Progress is being made, but will take time to be reflected in results 2007 will be transformational year Segment Summary Run-Off Block
Slide 41: Observations – First Days
Observations – First 50 Days CNO Distribution – a real strength Bankers Life – a very solid franchise CIG – making good inroads with IMOs, making its presence felt Colonial Penn – great direct marketing platform Distribution systems not particularly rating-sensitive
Slide 42: CNO Summary
CNO Summary Positive developments: Good profitability at Bankers Solid sales at CIG Poor results in Run-Off LTC Working aggressively to improve performance Conseco remains committed to growth Focused on attractive middle market Unique sales machine
Slide 43: Questions and Answers
Questions and Answers
Slide 44: 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 45: 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 46: 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 47: 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): Q3 05 Q4 05 Q1 06 Q2 06 Q3 0
Slide 48: 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 49: 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 50: Information Related to Certain Non-GAAP Financial Measures
Appendix: Information Related to Certain Non-GAAP Financial Measures (continued from previous page) Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Average common shareholders' equity 3,406.6 3,569.2 3,733.8 3,622.2 3,836.9 Average common shareholder's equity, excluding accumulated other comprehensive income (loss) (
Slide 51: 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 52: 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): Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Corporate notes payable 772.7 $ 851.5 $ 8