CNO Financial back on solid ground

Edward Bonach has never met Steve Hilbert. Never even talked to the guy who once occupied the CEO seat at CNO Financial Group (formerly Conseco).

"For what purpose?" Bonach said, when asked if he'd want to meet Hilbert. "I am a go-forward person. We're on a much different path."

Bonach's path since CNO hired him in 2007: tackling the company's legacy problems — most of which date to when Hilbert ran the show.

The turnaround at the once-bankrupt Carmel insurer has taken years longer than expected, and it's not done yet. But Bonach likes where things stand.

In early July, CNO finally cut loose Conseco Life, the financially troubled subsidiary that's long been a drag on CNO's earnings. As recently as the first quarter, CNO wrote off $298 million in losses related to Conseco Life.

Bonach and his team spent years trying to stem the bleeding, settle outstanding litigation by policyholders and regulators, and get Conseco Life into sellable shape. Connecticut re-insurer Wilton Re finally agreed to buy it for $220 million.

Bonach was happy to get anything for Conseco Life. Just a year or two ago, "we conceivably would have had to write a check to someone to take the company," he said.

While it's a slimmer version of itself without Conseco Life's 400,000 life policies and $4 billion in reserves, publicly traded CNO no longer needs to worry about the subsidiary's book of business oozing red ink.

The sale was such a big deal for CNO that securities rating firm Standard & Poor's immediately upgraded CNO's financial health from BB to BB+, saying the sale "will decrease future capital and earnings volatility" at CNO. S&P adds that CNO's "competitive position continues to improve," and "the stable outlook reflects our expectation that CNO will continue to generate solid earnings."

With Conseco Life cast off, CNO can focus manpower and capital on the goal that CNO under Bonach has staked out: selling life and supplemental health insurance and annuities to middle-income Americans, both working age and retired.

"We can turn management attention to positive things. This is really an important crossroads for the company," said Chief Financial Officer Fred Crawford.

CNO sells policies through three subsidiaries: Bankers Life (which boasts a potent sales force of 5,000 agents), Washington National (its main health insurance arm) and a direct-to-consumer company, Colonial Penn, which sells low-priced life policies online, through TV ads and an 800 number.

CNO is investing in all three. It expects to spend $40 million to $50 million a year for the next few years on business-building investments.

One crying need: IT improvements. Under Hilbert, who founded Conseco and ran it until his ouster in 2000 after the stock collapsed, Conseco was a rabid acquirer. But it failed to fully consolidate the new companies' accounting systems and other information technology functions, creating the back-office chaos that Bonach said he found when he was hired initially as CFO (becoming CEO in 2011).

As recently as two years ago "we had three different general ledgers and no common chart of accounts," Bonach said. To find out how many insurance policies CNO had in force, Bonach had to wait a day or two for an answer. And when earnings time rolled around, Bonach said, "The question was not, 'When were we going to report quarterly earnings?' it was if we would."

It took three years and $35 million, but now CNO has combined its books and gained confidence it will report quarterly earnings on time, Bonach said.

Even so, CNO is still only "in the fifth inning" with its plan to consolidate IT functions, said the CEO. When completed in another three years, the IT consolidation should create cost-savings in the tens of millions of dollars that will help boost CNO's return on equity from 9 percent to 10 percent, he said.

CNO also did itself a big favor two years ago by refinancing, for over $350 million, the expensive debt it sold during the 2008-2009 recession to investor John Paulson's hedge fund. CNO stock had plummeted to under 30 cents a share in 2009. Paulson's money, expensive though it was, helped CNO stay afloat —— and buy time for the recovery Bonach had in mind.

Last week CNO stock was trading above $16 a share — a far cry from its penny stock depths.

Wall Street, which shunned CNO stock at the time, now gives affirmations.

"CNO Financial's recent divestiture of Conseco Life, strong investment portfolio, stable ratings, cash position, improved earnings and significant capital deployment remain impressive," said a July investor report from Zach's Equity.

Bonach, 60, is a native of Minnesota who went to an all-men Catholic college (St. John's) and has a 38-year career in life and health insurance. A board member of the Boy Scouts local council and a grandfather with five grandchildren, Bonach is in many ways the staid opposite of the once-flamboyant Hilbert.

While running Conseco, Hilbert built a $25 million Carmel mansion that was one of the most expensive homes in Indiana, and used his wealth to put his name on the home of the Indianapolis Symphony.

After CNO took possession of the mansion in a lawsuit against Hilbert, it was Bonach who oversaw the sale of the 23,000-square-foot estate, along with artwork, home furnishings and other personal items Hilbert turned over. Today, Hilbert still lives in Carmel, tending to personal business interests. He didn't return a call asking for comments on the company he once ran.

Bonach describes his three-bedroom Carmel ranch home, where he lives with his wife Peggy, as "equivalent to the guardhouse of the mansion." His corner office in CNO's two-story suburban headquarters off College Avenue is similarly modest, even nondescript. It holds some potted palms and the walls display two framed actuarial certificates and a painting of sailing ships. "It was here in this office when I moved in. I liked it and kept it," he said of the ship painting.

Bonach's makeover of CNO is far from done.

Besides the IT consolidation, he wants CNO to attain an investor-grade credit rating of at least BBB (one step up from its current S&P rating).

To not have an investor-grade rating, which most institutional investors demand, "is no way to go through life" as a public company, said Crawford.

S&P says in its investor report that CNO needs to hit a return on equity of 11 percent (from the current 9 percent) and earn "clear expense advantage against peers," among other things, before it would grant an upgrade to BBB. That could take years.

One Hilbert high-profile move that Bonach inherited is the 20-year deal Hilbert signed in the late 1990s to put Conseco's name on the Indiana Pacers' Downtown fieldhouse that replaced Market Square Arena. The naming rights cost $4.5 million a year.

Since replacing the Conseco name with the name of its Bankers Life subsidiary on the fieldhouse, CNO has seen marketing and brand benefits, particularly in Indiana, where sales of Bankers Life policies have jumped, said CNO's chief business officer, Scott Perry.

"The fieldhouse lends a lot of credibility" to Bankers Life, Perry said. "It's a huge deal."

Of the 800 people a year CNO hosts in its suite and mezzanine seats at Pacers and Fever games, many are Bankers Life agents. "They see the name in those big blue neon lights. They take pictures," Perry said.

Perry's among a core of CNO executives who didn't jump ship. Instead they bet that the company could survive its 2002-2003 reorganization bankruptcy and ride out the recession.

Consistent sales from Bankers Life, which account for 61 percent of CNO revenue, helped persuade creditors in the bankruptcy to keep Conseco intact, relist its stock and reform its board of directors, said Perry, who used to be the Chicago-based subsidiary's president.

"They essentially said, 'We'll bet on the come. We'll bet we can make it through.' "

Perry gestures outside to the five-building Carmel campus, where about 1,600 employees work. "It could have gone the Chapter 7 route, and the bondholders could have liquidated the assets. None of this would be here today; these buildings would have been empty."

Perry credits Bonach for leading the effort over the past five years to repair and revive the company that Hilbert built to position it to sell policies and annuities to the broad cross-section of middle America. That includes a huge wave of aging Baby Boomers, 25 percent of whom lack life insurance.

"Ed's a real Main Street kind of guy. He's a perfect fit for who we are, with his midwestern roots. And his financial acumen really served an important role during the crisis."

For his turnaround work, CNO's board has rewarded Bonach with rising salary, bonuses and stock grants. He earned $6.3 million in total compensation last year, up from $4.9 million in 2012 and $3.56 million in 2011.

Not a bad haul, but it's just a fraction of what Hilbert earned in the high-flying 1990s. In 1994 alone, Hilbert pulled down $117 million.

Call Star reporter Jeff Swiatek at (317)444-6483. Follow him on Twitter: @JeffSwiatek.

CNO Financial Group

Business: life and health insurance holding company.

Major subsidiaries: Bankers Life, Washington National, Colonial Penn.

Founded: 1982.

Headquarters: Carmel, Ind.

Revenue (2013): $4.4 billion.

Earnings: $238 million.

CEO: Edward Bonach.

Employees: 4,300 (1,600 in Carmel).