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CNO Financial Group, Inc. (CNO)

Q2 2012 Earnings Call

July 26, 2012, 12:00 p.m. ET


Scott Galovic – VP IR

Edward J. Bonach – CEO

Scott R. Perry – CBO, President Bankers Life

Eric R. Johnson – CIO

Frederick J. Crawford –CFO


Ryan Krueger – Dowling & Partners Securities, LLC

Randy Binner – Friedman, Billings, Ramsey

Paul Sarran – Evercore Partners

Chris Giovanni – Goldman Sachs

Erik Bass – JP Morgan Securities, Inc.

Sean Dragan – Macquarie




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Good morning. My name is Hatty and I will be your conference operator today. At this time, I would like to welcome everyone to the CNO Financial Group’s Second Quarter 2012 Earnings Results Conference Call. (Operator Instructions)

Mr. Galovic, you may begin your conference.

Scott Galovic

Thank you, Operator, and good afternoon and thank you for joining us on CNO Financial Group’s second quarter 2012 earnings conference call. Today’s presentation will include remarks from Ed Bonach, Chief Executive Officer, Scott Perry, Chief Business Officer and President of Bankers Life, Eric Johnson, our Chief Investment Officer and Fred Crawford, Chief Financial Officer. Following the presentation, we will also have several business leaders available for the question and answer period.

During todays’ conference call, we will be referring to information contained in yesterday’s press release. You can obtain the release by visiting the media section of our website at

. The presentation is also available in the investor section of the website, and was filed in a form 8-K this morning. We expect to file our second quarter 2012 form 10-Q, and post it on our website, on or before July 30



Let me remind you that any forward-looking statements we make today are subject to a number of factors which may cause actual results to be materially different than those contemplated by the forward-looking statements. Today’s presentation does contain a number of non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures. You will find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix to the presentation.

As a reminder, effective January 1


, 2012, we adopted ASU 2010-26, which modified the definition of the types of acquisition costs that can be deferred by insurance companies. We elected to adopt a new guidance on a retrospective basis, and accordingly, all prior periods presented have been retrospectively adjusted. The new guidance impacts the timing of the recognition of profits on our business, but has no impact on cash flows, statutory financial results or the ultimate profitability of the business.

Throughout this presentation, we will be making performance comparisons and, unless otherwise specified, any comparisons made will be referring to the changes between Q2 2011 as we stated for the DAC renouncement, and Q2 2012. And now, I’d like to turn the call over to our CEO, Ed Bonach. Ed?

Edward Bonach

Thanks, Scott, and good afternoon. CNO’s core businesses continued their positive momentum and performed well during the second quarter. Investments we are making in distribution and business growth continue to yield solid sales and earnings results. We reported net operating income of $54.2 million, which was up 22% over last year. Sales grew for the fourth consecutive quarter, and were up 6% from the prior year, primarily due to the increases in the sales of life and supplemental health products. These increases were partially offset by lower annuity sales as a result of the low interest rate environment and the product adjustments that we made during the year.

Scott Perry will touch on the sales details later in the presentation. Statutory earnings for the quarter were $97 million, up 23% from the prior year. Our strong financial position and our continued generation of cash and excess capital allowed ups to continue to buy back stock at an accelerated rate. As previously announced, the board of directors approved an additional $100 million for share repurchases, removed the combined repurchase authority outstanding to $172 million as of the end of the second quarter. Also during the quarter, the board approved initiation of a dividend program, and our first dividend payment was made during the quarter. This was a significant milestone for CNO, marking the tremendous progress the company has made through some of the most challenging economic conditions in our history, and also demonstrating confidence in our current and future cash flow and financial strength.

Our key metrics of risk-based capital and debt-to-total-capital improved further during the quarter. Fred will touch on these in more detail later in the presentation.

And finally, we continued to emphasize and focus on profitable organic growth in our three core segments. Reported net operating EPS in the quarter was $.20 per share, up from $.15 per share in the prior year. To enhance the understanding of our operating results, slide seven shows our operating EPS adjusted for one notable item occurring in both this quarter and another in the year-ago. Our second quarter operating earnings and operating EPS were the highest achieved in the last two and half years.

Slide eight shows our trailing four quarters consolidated operating return on equity. Trailing four quarters’ earnings, we’re up 6%, but this is outpaced by the increase in average common shareholders equity of 10%, resulting in ROE being down slightly from the prior year. Our statutory results, free cash flow and excess capital generation provide meaningful insights on CNO’s enterprise value. As we have discussed before, our levers to improve ROE continue to be layering on profitable new business at a minimum 12% unlevered after-tax return, effectively deploying our excess capital, improving OCB margins and continuing to improve efficiencies across the enterprise. While we have made progress in growing earnings, and as important, earnings stability, we have made even more progress in restoring the balance sheet and deleveraging. Having now achieved capital ratios consistent with upgrades, we expect continued earnings growth in capital management to contribute more to increasing our ROE. It’s also worth noting the ROE convention of reporting on a trailing 12-month basis somewhat masks the run rate progress we have been making in advancing ROE. This, of course, will eventually come through as we post continued strong quarters.

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