On Day One for Obamacare, Reforms Signal Opportunity

Today, on this 6-month anniversary of the signing of the Patient Protection and Affordable Care Act, a number of the reform's key provisions impacting insurance companies begin taking effect.

In my last post, I shared with you some comments from Edward Bonach, CFO of CNO Financial Group Inc. of Carmel, Ind. I found Bonach's perspective rather refreshing in light of what might be called his “glass-is-half-filled” outlook on the new reforms. It is not exactly what you expect to hear these days from an insurer's finance leader. Then again, CNO Financial appears to be unique in a number of ways.

Before I share a few interesting facts about CNO, I should mention that the $4.3 billion company recently underwent a name change, having previously gone by the name Conseco Inc.

Last May, when the change was made, the storied company said that the move was in part intended to more clearly distinguish the parent company from its principal insurance companies: Bankers Life, Colonial Penn, and Washington National.

No doubt, the name change was also intended to help management signal the opening of a new chapter for the insurer.

In truth, this chapter may have opened a little over 4 years ago with the arrival of CNO's CEO, C. James Prieur, and CFO Bonach. However, the downturn would ultimately test this new leadership team.

“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,” recalls Bonach (read our complete interview).

For its part, CNO returned to profitability last year after posting losses throughout 2007 and 2008. “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,” says Bonach.

Much of CNO's new capital infusion came by way of John Paulson, the hedge-fund manager whose bet against the U.S. subprime market helped him earn an estimated $2.5 billion in 2008. The investor agreed to increase his stake in CNO by buying as much as $277.9 million in stock, warrants, and convertible debt. At the time, CNO shares jumped nearly 30 percent.

Paulson has placed big bets on a number of different financial firms (Bank of America Corp., Goldman Sachs Group Inc.) as the U.S. is released from the recession's grip. His bet on CNO's comeback immediately put a spotlight on the insurer's sharpened focus on serving middle-income, aging baby boomers.

It's a strategy, Bonach claims, that has positioned the company well to benefit from the Obama healthcare reforms.

“We believe that the reforms are neutral to positive for our business. The main reason I say that is that our market focus is 65-year-olds and older, and it's our opinion that due to the healthcare reforms, Medicare is going to be cut back. This means that there will be more of a gap that needs to be supplemented. The Medicare supplement products that we offer will be even more needed and on average be a larger policy because of the gap growing.”

While the first of the Baby Boom generation will become Medicare-eligible in 2011, CNO management estimates that the number of people 65 years old and over will increase by 50 percent over the next 10 years. ###

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