CNO Financial Group, Inc. (CNO) Q1 2013 Earnings Report, Transcript and Summary

Thank you, Jimmy, appreciate it, and Arun, thank you also for the invitation. I very much enjoy this conference because it’s a nice balance of both equity investors and fixed-income investors. And particularly as a below-investment grade issuer of debt, which we are, both those constituencies are material to the company and so I appreciate you attending. The nice thing about, I think, these days the industry is – there tends to be a lot of commonality in terms of concerns on both the equity side and on the fixed income side. They tend not to diverge these days, they tend to be orienting around the same things and so hopefully my comments will help both constituencies understand better where we’re headed as a company. Please take a look at the forward stating commentary. I’ll let you do that on your own. The outline today is really the, first slide and essentially I just want to talk a little bit about the markets we serve which are quite unique compared to most in the industry and how we serve it is relatively unique. How we deliver our products, talk a little bit about where we plan to make investments in building out their franchise, some of the earnings dynamics and then a slow and steady build through the capital and I’ll explain as we get there starting with some of the deeper tissue actuarial dynamics building up through the capital of the company and then into where we plan to go with deploying capital. So first of all, what differentiates CNO? Number one, we are exclusively targeting the middle market and whether you read Conning research or LIMRA research or more recently McKinsey studies on the industry, our own center for secured retirement which is our own research institution inside…

Yes, so long term care, we sometimes like to call it a four letter word at the company, because it’s certainly dealt with that way by both rating agencies and investors and for good reason. The track record is anything but stellar, and it’s proving to be one of the more complicated businesses to manage consistently and profitably overtime. And a couple of things to recall about CNO, one is don’t lose sight of the fact that we took $3 billion of the truly longer and fatter tail long-term care business and walled that off completely from the company into trust. We effectively neutralized it, we have no risk on that business or even affiliation with that business and so that was a very important move that was made back a number of years ago, pre crisis. So that then leaves you with fundamentally the Bankers long term care business. We have a small run-off block of long term care but it’s very small. It’s 10% of the run-off block that we have and it is somewhat immunized in the sense that we put up a very large reserve recognizing that the benefit ratios will climb on that business over time. So, it’s a relatively steady business that is simply running up. So it leaves you with Bankers long-term care. And what we have been doing very importantly, we have rules of engagement on long-term care as a company. One is, if you can’t asset liability match, then you have no business being in the business, whether it’d be long-term care or any other business. And so very uniquely at CNO because of the older age of our population, we tend to have a much shorter duration than the typical long-term care policy. We tend to run it about a…

Yes, it’s a good question. The reality is that we’re very unlikely to use our currency to facilitate any sort of M&A activity and the reason is the same reason we’re buying our stock back. We believe it to be at a value point where we can create an attractive IRR for our shareholders by buying the stock back. And so, that raises the IRR threshold or think of it as raising the discount rate being applied to target properties and so because we are unlikely to use our stock currency, it’s going to contain the realistic dollar amount that we would deploy for M&A. The other is, we just got done resetting our debt structure and we reset it in an attractive way and created a more permanent dynamic for us in that we were able to install enough financial flexibility to where we could maneuver and manage our capital structure effectively even while amortizing the debt. And so, if you think about a less willing to use your stock currency and not particularly excited about re-opening your debt structure as a company, that ends up pinning you into your excess capital and excess capital generation. We had or have a $150 million of excess capital at the holding company, but I announced a tender that may take $200 million to satisfy here in the coming weeks. I generate $300 million plus of free cash flow a year, but I need to amortize my debt and do some other thing with it. So you can see if you sort of do the math on that, you can sort of settle into what is likely to be the range of capital deployment if we were to find something that could compete with these other, frankly, organic investments that we’re making which we find very appealing and the buying back of our shares. Jimmy Bhullar – JP Morgan: Okay, we’ll end it there. Thanks, Fred. Okay.

Thank you.