A Talk with CNO Financial CFO Ed Bonach

Like most top insurance executives, Edward J. Bonach, CFO of CNO Financial Group, has lately spent a good deal of time trying to discern the business impact of President Obama's healthcare reform law.

Of course, healthcare is only one factor impacting CNO's business. We recently caught up with CNO's finance leader and asked him how finance is helping to address the variety of challenges facing the insurance sector.

BF: How would you distinguish the challenges that finance faces in the insurance sector from those in other sectors today?

Bonach: Well, since we're in the life and health insurance business, we really have long-term obligations or liabilities that a lot of other industries don't have. We are providing protection that in some cases covers decades; it can take 30, 40, even 50 years to fulfill our obligation to the end consumer. This provides some unique challenges to finance and the balance sheet, making certain that we have invested funds appropriately and established reserves for those future obligations.

The other thing I would point out is that while virtually every industry is regulated, I believe that the insurance industry is regulated more than the average industry, and while certain aspects of that regulation are federal, we are primarily state-regulated, which means that doing business in all 50 states or 51, 52 jurisdictions, we have 52 different regulators that we need to satisfy, and even though we do have what is called the National Association of Insurance Commissioners, which is meant to try to harmonize regulation, it's far from harmonized in many aspects. What works in Indiana may not work in Illinois or New York, for example.

BF: How is your finance organization structured to deal with this type of fragmented regulatory challenge?

Bonach: We have a part of finance that is focused on statutory or regulatory reporting, so the reporting of balance sheets and income statements and supplemental reporting all have to meet the requirements of the state regulators. Meanwhile, we have our GAAP reporting for the public markets, and then we do a third set of reporting for tax purposes, which is closer to the statutory reporting, but is yet different. From that standpoint, we really need to prepare three sets of financial statements on a regular basis.

We and the industry have certainly benefited from the advancement of computing power and technology, and what that has led to us doing is a variety of projections under various scenarios. We do what is called statistic scenario testing, where you build models that try to relate a number of both consumer behavior and investment market behaviors together. This has added insights into the liability structure of our business, which has helped us to formulate an investment strategy and structure that supports it and to a large extent matches it.

BF: Would you describe CNO as "leading-edge" when it comes to leveraging technology, or has your technology adoption been more evolutionary over time?

Bonach: I would say that it's more evolutionary. There have been times when we may have taken more of a leap forward, but our strategy has not been to be leading-edge. As far as the technology goes, we tend to be followers, perhaps fast followers, but we don't think that we would be well served to be leading-edge when it comes to technology.

BF: Take us back in time. How did you respond to the downturn?

Bonach: Eighteen months ago, we had a question raised by our auditors: "Are we a viable, going concern?" If we had not been deemed a viable, going concern, that audit opinion would have resulted in a default on the biggest part of our debt and capital structure.

We were literally in a fight for our survival, and the finance organization responded in a stellar way. We provided information on the fundamentals of our business and the near-term, intermediate-term, and even long-term potential, so that we were able to negotiate with our lenders and amend them to our credit facility. This gave us additional margin on our covenant and debt. We had not violated any of the covenants, but the audit opinion that was forming was that we might violate them in the next 12 months. Through a combination of financial information and negotiating with the lenders, we did amend our covenants to give us more room. We got the clean opinion from our auditors, and we subsequently were able to further restructure our capital, pay down some debt, replace some convertible debt that was going to be coming due in the next year, and raise almost $300 million in new equity capital on top of that. We significantly were able to improve our capital structure and liquidity and set the path to where we followed that period with six consecutive quarters of profitability, whereas many quarters prior to that were not profitable.