CNO Financial Group Inc (CNO) 2002 Q1 法說會逐字稿

Thank you for holding and welcome to the Conseco Teleconference. We will begin with an address by Tammy Hill, Conseco's Senior Vice President of Investor Relations. During the presentation, all teleconference participants will be in a listen-only mode. A question-and-answer session will follow the presentation. If you need operator assistance at any time during the call, please press star 0 and an operator will help you. I would like to advise everyone this conference call is being recorded. Thank you for your attention, and here is Tammy Hill.

Good morning, and welcome to Conseco's first-quarter 2002 conference call. We'll be referring in the call today to information contained in our first quarter earnings release. Can you obtain that earnings release by visiting the news center section of our website, conseco.com, or by calling our fax-on-demand service at 1-800-344-6452. The forward-looking statements to be made in this call are subject to a number of factors which may cause actual results to be materially different than those contemplated by the forward-looking statements. Please refer to today's earnings release and to our latest Form 10-K annual report for additional information concerning the forward-looking statements and related factors. And now, I'll turn it over to Gary Wendt, our Chairman and Chief Executive Officer. Gary?

Good morning to all of you along the network, and a special good morning to those of you in the audience this morning. We're coming to you from the Conseco Conference Center, and we're joined by oh, I would say between 75 and 100 of our Conseco associates who will be listening in to the presentation we make this morning. On the podium with me, I have a rather large group to field any questions that you might be having. First of all, Bill Shea, who is our President, Chief Operating Officer and Chief Financial Officer, Jim Adams, who is our Chief Accounting Officer, Chuck Cremens, who is newly -- I should say within the last quarter -- has become the President of Conseco Finance Company, Liz Jorgikopolis President of our newly formed Conseco Insurance Group, and Ed Baraby, President of our not-so-newly formed Bankers Life Insurance Organization. As Tammy mentioned, we sent out the press release to you this morning at 6, so I know you had a chance to read it and to glean the information out of it that you wanted. I'm going to just cover some of the highlights of that press release, and then Bill Shea will go into a little more details on the financials, and then after that we'll have plenty of time to take questions from you. As has become kind of custom in Conseco quarterly announcements, we have some information that can meet the expectations of our entire broad audience. Whether you be a supporter or whether you be a detractor, you can find some things in this press release to talk about. But I must say that, overall, we in management are very encouraged about the progress we're making in turning around Conseco from a company that was in very, very bad shape less than two years ago. I'd like to start by saying that our many cash-raising efforts have positioned us to fill the gap which we disclosed last October. The completion of all these actions will more than pay off all the debt due in the year 2002, and we're highly confident now about our debt raising and our debt-paying ability for 2003 and beyond. One thing I'd like to have everyone remember is that we had last October about $400 million worth of public debt that was due in the finance company, and we had hoped to refinance that, but it became very clear after September 11th that we were going to have to pay it off. Well, after the last several months of a lot of hard work by the Conseco finance people, they have tendered for all of that -- of that debt that's outstanding, and all but $43 million of it has been sent in under the tender arrangement, and the $43 million will be paid off in June and September of this year. At that time, there will be no more public debt due in Conseco finance, so that's a big obstacle that we have overcome thanks to the efforts of the Conseco finance people. Our first quarter operating earnings were $39.9 million, or 12 cents a share, right about exactly on the operating plan that we have been working on inside of Conseco for the year 2002. However, we must say that in comparing these numbers with one year ago, or, in fact, one quarter ago, we had an eight -- we had an 8 cent per share charge of goodwill that existed last year. That is not included under the new accounting rules on goodwill for the year 2002 and going forward. Within that -- within the numbers of profits for the first quarter on an operating basis, the finance company was up 23% over the fourth quarter of '01, as signs of an improving economy begin to show through in delinquency. For the quarter, our 60-day delinquency was down 11 basis points, down 11 basis points, I want to emphasize that, and 30-day delinquency was down 54 basis points, so after the effects of the recession on repossession inventory for manufactured houses remains high, and is going to continue to be one of the challenges we face, through the rest of this year and into next year, but at least we know that the trend is beginning to go in a negative direction, negative in terms of 30-day and 60-day delinquencies. New originations for the quarter were down 5% from a year ago, but all of that was in the manufactured housing business. We're taking the tack in the manufactured housing business that unless we can get both price and quality of credit, we are not interested in financing manufactured houses just for the pleasure of being in the business, and putting a lot of volume on the books. So the manufactured housing business was down 5% in the first quarter, but in our other two segments in the finance company, home equity and retail credit, or private label credit cards, we had increases in the volume of activity in both those areas. The insurance group was on plan, on their plan for the quarter of $163.7 million of pretax operating earnings, but that was down 18% from the fourth quarter '01. Bill is going to give you an explanation on the variances that caused that. Some are variances that will be with us for a while, and some are, we believe, one-time charges. Now to the not-so-good news in the report that we sent out this morning. As has become all too common in Conseco, we have a list of special charges, non-operating charges which we must report and which, in this quarter, totalled $137 million after tax. Therefore, adding the operating income to the loss, from the non-operating items, will bring our net loss for the quarter from all items to a loss of $97 million. Included in these non-operating charges are many usual things. I like to call them legacy items, because they're situations we simply have to clean up from the past. Net realized losses on our investment portfolio, the mark-to-market on our AT&T Wireless assets that we have, provision for reserves related to guarantees on officers and directors stock program, which was started some six or seven years ago, and this quarter, one thing that's a little bit different, where we are reporting some of the book losses we took on assets sold to raise cash, and also some reserves that we've set up for business structuring recharges. So to conclude, I will note that our bond exchange program was also successful during the quarter, and that smoothed out our 2004 through 2009 principle maturities, and also, reiterate our guidance for the year of 60 to 70 cents per share. So that's an overview, highlights of our statement -- or operations for the first quarter of the year 2002, and I'll turn it over to Bill Shea now who will go into the financial information a little more detail.

Thank you, Gary. And good morning to everyone on the call, and especially to the people here in person at our headquarters in Carmel. I want to thank all the employees of three businesses and also at CCM, and at corporate for all the hard work that has been done over the last several months, in particular to get us to this point. It took an incredible effort, and it shows in what we've been able to do and what we've been able to report today, particularly in our cash-raising efforts. And in no small part, it's due to all of you. In terms of looking at our earnings, I'll assume everyone has read the press release and have some questions, and I'll try to answer some of the bigger ones up front. Our insurance earnings are down from our 2001 run rate, $163 million versus the 2001 run rate of just over $200 million per quarter. And as our press release indicates, 20 million of that is from our long-term care loss ratios. Another $8 million is from last-rate assumptions in a traditional life block of business that we acquired in the mid-'90s. This lapse rate assumption did not result in increased amortization or DAC or PVP since the change was to decrease lapses. Decreased future lapses, as you know, result in higher required reserves, so that hurts our earnings, and that will continue to have an impact throughout the year. Also, there was a $7 million earnings impact for certain reinsurance agreements, transactions that we concluded effective January 1st, and they were specifically Banker's Life and Casualty, traditional life block, and the traditional life block from our variable insurance company, [Pacific]. I do want to make the point that the reinsurance here is from an existing fixed block, so we expect future earnings -- or future earnings impact to be less as we get into future years. But there are some very, very good news that Gary has -- has already talked about that I want to emphasize. Total cash expected to be generated to the parent from our various reinsurance transactions and other sale transactions is over $528 million and still counting, and this'll happen in '02, and a lot of this money, as you might expect, is subject to insurance regulatory approval, but we have received approval for some of the funds, and we expect to get approvals for the rest of it if needed. The total expected impact on insurance pretax operating earnings from the reincharged transactions f we do them all, is $90 million to $100 million for the full year 2002. Insurance pretax operating earnings for the full year 2002 are expected to be in the range of $640 million to $680 million, and here's how it breaks down. In addition to the 90 to 100 million reinsurance hits, or lower earnings, there's also decreases in earnings from our life products as I've just talked about, and earnings declines resulting from our declining annuity base. Less assets under management, less earnings. The declines in life and annuities are expected to only partially be offset by improvements in growth in our supplemental health products. We do expect those products to grow, and they will help offset some of the -- some of the downtick in earnings. But we wanted to get that out and explain what the full year will look like, and we obviously hope to do better than this. Now, turning to finance, our consumer finance business. Our finance earnings stabilized and were up slightly from the fourth quarter of '01. Profit margins are certainly not at our targeted levels, but we proved that we could remain profitable in an extremely tough, difficult economic environment, and I think that's a -- that's a real plus. We were still able to make some money. Continued improvement in the economy, along with the continued runoff of all the off-balance sheet receiveables will eventually help us to get to targeted profit margins. Our on-balance sheet book of business is making money, and the drag is all the off-balance sheet stuff that we talked to you about over and over. We are beginning to see real benefits of our debt reduction efforts. Corporate interest and dividend expenses decreased from $128 million in the fourth quarter, and it's down to $118 million in Q1 and it'll keep reducing, as we pay down our debt, this line item will continue to decrease, and that's a very good thing. The finance company's cash flow is not only meeting expectations, but they're proving it, as Gary mentioned, by tendering for all of their outstanding public debt. They've been able to generate enough cash flow by themselves to pay back all public debt and a tiny little piece that was due next year. Expected insurance company cash flows to the parent of approximately $400 million to $500 million are all still consistent with our original estimates. You may have noted in the 10-K that there was $300 million of a net amount. That takes out other corporate operations, corporate cash expenses, finance fees, security litigations settlement, and D&O interest payments. In total, and I think this is very significant, our finance and insurance operations are generating between $700 million and $800 million per year in free cash flow. This company has cash flow, and I hope we can find ways of improving it and, in fact, that's what we're doing. Now, all of this wouldn't happen without a tremendous effort of our employees. We're not a company I consider very customer-friendly, agent-friendly, policy-holder-friendly. We have a host of programs for getting better and better organized. It's Liz Jorgikopolis' area, Ed's Baraby's area, Chuck Cremens' area, they're all starting to take effect. What we want to be is we want to be a company that serves our customers well, provides in the products and the answers they need, and we're really getting after it, and we're going to keep improving operations every quarter, and the people at this company are doing it. I'm going to hit another area that is so interesting that people may stand up and cheer, and that's goodwill. We said in our 10K, that we'll probably take a goodwill writedown. The primary reason for that, although the company passes as Gary said many times, three out of the four tests in this new accounting pronouncement, the pronouncement is very market, focus market value, focused, and if we use market value discounts, we may well see a significant goodwill reduction, and we'll have that calculated in the second quarter, and we'll report it to you then. Of note, though, is that the goodwill writedown is ignored for purposes of calculating our covenants under our amended bank agreements, so that is very significant. I just want to mention one more thing about our confidence going forward with our ability to create transactions, generate cash and have liquidity to get through '03. We believe we're sold '02 and we'll have plenty ideas, more ideas all the time about how we can pay off our obligations, and actually get back to a company that has a normal capital structure. We're well on our way, made a lot of progress, and I think you're going to see more progress quarter by quarter. With that, I'll turn it back to Gary.

Okay, Bill, thank you. I'm going to end by doing quite a bit of repeating from what Bill said, because, very frankly, we're quite pleased with what we've been able to accomplish in the first quarter, as far as our cash-raising initiatives are concerned. Conseco Finance has in the four months -- the first four months of this year surpassed its -- surpassed its cash-raising targets for the entire year, and because of that, without any support from the parent company, they've been able to generate enough cash to pay all outstanding public debt, plus provide at least $50 million of cash to the parent over the rest of the year. The insurance companies are in the process of completing their over $500 million of transactions, which are principally reinsurance transactions, and that will add to the $450 million of operating cash flow that we plan on getting from the insurance companies this year. Now, reinsurance has a cost to it. There's no question about it. It means that it's lower earnings from our insurance companies, because we sold off blocks of business. But as importantly, these are closed blocks of businesses, so over time, the effects on earnings will decrease, and as importantly, we managed to complete these cash-raising initiatives, both in the finance company and in the insurance companies without doing anything to affect our overall business activities. The finance company is still in their three major lines of business, manufactured housing financing, home equity financing, and retail credit. And our two basic insurance businesses, Conseco Insurance Group, and Banker's Life, are still providing the same products through the same distribution organizations that they were before we started this cash-raising initiative. Back in the middle of the year 2000, we owed $1.2 billion in the next 60 days. In the next 12 months we owed an additional $800 million in the next 12 months. In the year 2002, we have faced in to the wind of $400 million from Conseco finance, and another $350 million of -- of debt due at the parent company, and we're faced in to that, and now have that taken care of, and we know there'll be more debt coming due in future years, but we have a great deal of confidence in our ability to meet those future year payments, because of what we've done. And our earnings should now be able to continue to grow now that we have the reinsurance items behind us. So, thanks to all those cash-raising activities, we're going to live to fight another day in Conseco, and that fight is going to be to provide customers with good products in their middle-market arena, and have low-quality -- I'm sorry, a high-quality, low-cost operation on which we do it. So with that, I will be happy to take your questions.

Ladies and gentlemen, we will now begin the question-and-answer session. If you have a question, you may now press the star followed by the 1 on your phone. If your question has been answered, and you wish to withdraw your request, please press the star followed by the 2. One moment, please, for your first question. Your first question is from Steve Oddsman with Chilten, please proceed.

Hi, good morning. I have a bunch of questions, in the 10-K, it said in the fourth quarter of 2001, loss medication techniques were used on 3.1% of the portfolio. I'd like to know what percentage that was in the first quarter of this year. Second question is, you sold $395 million worth of loans in the first quarter this year. You booked to gain of $7.2 million, but in the cash flow statement, it says that you only got $346 million in cash. So cash flow was $49 million, an actual loan sales. How are you able to book a $7.2 million gain? And, also, this sale of loans, is this the source of the $300 million worth of cash that Conseco has used to pay -- Conseco Finance has used to pay off its debt? And finally, if you'll permit me, the $100 million that's mentioned in the press release of lost earnings in the finance company amounts to about 16 cents a share, which seems to me puts you 16 cents a share in the hole for your guidance for this year. Where you going to make that up? Thank you.

Let me answer the last question very quickly, and I'll turn the rest of them over to Chuck Cremens who runs our finance company. We had planned in our budget for this year and for our estimate of 60 to 70 cents a share that we would have costs of reinsurance of about the 16 cents a share, which you're mentioning, so we have factored that into our estimates. Chuck, do you have the answers to the questions on the sale of home loans?

I'll give it my best shot, Steve. Let's first talk about loss mitigation. Loss mitigation in the first -- in the first quarter of this year was 3%, done slightly from 3.1%. As you know, I think you probably were at the November investor conference. I wasn't there, but as I understand it, there was a significant amount of effort put forward by the finance company in terms of talking about our loss mitigation, and our techniques in that area. Loss mitigation is our approach to make sure that we're doing the best to maximize the economic benefit of any of our investments, and it's a technique unfortunately that becomes heightened during tough economic times, so where we're at right now is at 3%, down slightly from 3.1. At the same time, seeing a material reduction in delinquencies, we feel pretty good about that. As it relates to loan sales, there were three parts to the loan sales. One was our normal course of business, which was, I think, approximately $170 million, which was home equity loan sales. The other that makes up that $300 million number was, in fact, assets that were sold, primarily discontinued business assets that were on the books, nonstrategic, that were used in part to pay off the debt.

And is this the source of the cash flow that used to sell off the -- to pay down the debt? Because it's -- it roughly equals the -- it roughly equals the amount that was mentioned in the --

Well, actually, the loan sales that were normally be done in our business, the home equity portfolio, was, in fact, that doesn't generate truly $170 million in cash flow, but it does -- in net cash flow. But the other $180 or so that was accomplished in that number was pure dollar-for-dollar cash that was used to repay the debt.

That's the source of paying down the debt?

Yes.

Your selling loans?

Yes.

Okay, thank you.

Yep.

Your next question is with Andrew Kilgerman with Bear Stearns. Please proceed.

Good morning. Just a quick question. The first question is the pickup on the loss ratio on long-term care. Could you give me a little color on why it picked up and what your expectations for that going out through the next year or so would be? And then I have a follow-up.

I think we'll let both Liz and Ed Baraby talk to the question about increase in loss ratios on long-term care.

Yeah, let me take a stab at it, because the trend is fairly -- it's pretty similar across the two insurance entities. Really two things going on there. The first is we had a carry-over in backlogs, claims paying from the fourth quarter that carried over to the first quarter, which should not recur, as we've been able to bring those operations and the staffing levels in there back up to where they need to be to keep that current. There is a slight indication that there may be an uptick in bad experience, which we will monitor over the next few quarters, so it would be early to say that some piece of this might not recur, but we don't have enough facts on the table at this point to really

Your follow-up?

Well, just to stay with that, I mean, how much did the backlog add to the loss ratio? And what are you seeing that really makes you think it might tick up? What kind of problems?

Well, the majority of this tick-up is, indeed, the backlog based on when the claims were incurred. We have seen a slight uptick in incurred claims in the fourth quarter that won't emerge in paid claims until next quarter, but, again, the majority of this was the backlog carry-over from last quarter.

All right. And I think the up tick in first quarter, it's just a one-quarter up tick, so we're not sure if, in fact, that will continue through 2002. We'll have to wait and see how things play out over the next couple of quarter.

And then, just regarding the net interest margin, that contracted. With so many players having exited the business, one might expect the net interest margin to expand rather than contract. Could you talk to why it's contracted and where you think that it'll go over the course of the year?

The primary driver behind that downtick in net interest income is, in fact, the shrinking of management within our annuity business.

No, I'm --

The good news is the marketplace is very favorable now to fixed annuities, which is our specialty. The bad news is Conseco has been pushing water uphill a bit in that market with some of our internal challenges. We are confident that, you know, we're going to be able to participate in that uptick over the course of this year, obviously assets shrinking, we're going to have to do that pretty quickly, so I would say over 90% of that shrinkage has to do with assets under management shrinking.

I'm thinking more just in terms of the finance company, though. I mean, that was helpful. But you went to 5.2%. Could you talk to the finance company's net interest margin of 5.2 coming down?

Yeah, that came down actually for two major reasons. One, in the fourth quarter, there was a little bit of a benefit associated with a tax refund that was received in that fourth quarter, interest income on a tax refund that was received. That was approximately 10 basis points of that margin decrease effectively from the fourth quarter. The other was that in the first quarter, we had a maturity of an off-balance sheet portfolio and floorplan. That maturity effectively required us to take it on the balance sheet, so we took approximately $480 million of floorplan assets on balance sheet. When that had been done back in 1998, the interest income was effectively flowing through the net interest margins, so what occurred in the first quarter was that for no increase in net interest margin, we effectively increased the assets on the balance sheet by that 480, and, therefore, net interest margin as a whole, therefore, decreased by approximately 11 basis points in the first quarter so that makes up most of your reduction.

Okay, then, so you probably assume it would be pretty stable throughout the rest of the year, the 520?

Yeah, we're looking -- well, I don't know how much forward projections I can give on this, but we're looking optimistically for margins to improve, in part because as the previous questions of finance was asked about what went on in cash initiatives, we got rid of a lot of lower-yielding assets, therefore, hopefully margins will increase going forward.

Thanks much.

Next question?

Your next question is from David Havens with UBS Warburg. Please proceed.

Good morning. Actually, I had two questions, both of which come from the cash-raising section of the press release. You mentioned possible further transactions and other available cash positive options. Could you maybe just dimension what you might be alluding to here, and maybe elaborate with as much specificity as possible whether you're talking about potential future reinsurance transactions, outright block sales, et cetera? And the second question is, you go on to say that Conseco should be in a position to restructure its existing debt in a permanent and cost effective manner, presumably in 2003. Are you thinking strictly in terms of a debt solution at this time or might equity also be employed, assuming the market conditions are receptive?

Well, I think the list of things that we can do to raise money is one that's very long and very complex. We've shown year after year that we have a significantly sized balance sheet that allows us to pick and choose in places where we can raise cash to overcome debt that is due, the principle payments that are due. As to your second part, everything is included in our alternatives. The ones we choose will be the ones that will be the most effective for the shareholders.

I sometimes think it isn't obvious about how much flexibility we have, not only in the insurance companies but particularly at the finance company, in terms of the ability to generate transactions off the balance sheet, or to create transactions given market opportunity. There's certainly still a lot of that, and we're exploring other possibilities to leverage some of our -- some of our assets in interesting ways. We own a bank out in Utah, and we have other types of transactions that we're looking at. If a goodly number of those come true, I would think that people would be -- finance this company, and, as Gary said, there's lots of ways to did it and we'll explore [AUDIO OVERLAP]

Excuse me, whoever --

Operator?

Hello?

Were you able to hear the end of that answer?

Just missed the very end.

We'll explore all kinds of opportunities.

Oh, okay. [ LAUGHTER ] And you mentioned being able to generate some cash out of the finance company, and there seems to be a fairly large block of, I don't know, short investors out in the market that say no, the finance company is a black hole. Just, if you could, describe it a little bit more detail what additional options you might have available through the finance company that might help people out.

This is a perfect question for Chuck Cremens, so I'll turn it over to him.

It might have something to do with black hole comment. I think that at the finance company, as you know, finance companies are transaction companies, and what we do is we originate assets, and then leverage them in one form or another and pick up margin of profitability. There are a number of assets that are on the books at the finance company at this point in time that we think may have more efficient corporate financial solutions, and we're looking at that. Obviously, some of our opportunity has been constrained in the past based upon the performance of portfolios that are both on and off the books. So believably, if we can continue the kind of overall portfolio performance that occurred in the first quarter here, our options actually will increase.

Okay. Thank you.

Next question, please.

Your next question is from Jim Wolf with RBC Capital Markets. Please proceed.

Good morning. With respect to the future transactions in the insurance company you've been discussing, I believe you've mentioned reinsurance and sales transactions to exceed $520 million this year. Can you give us any further detail on your thoughts with respect to how those transactions are going to be completed, sales versus reinsurance, and could you also give us an idea of the magnitude of the book of business that might be involved here? I know your two transactions previously announced dealt with blocks of business, roughly 400 million each, wondering how large the other blocks might be?

Well, we're -- you know, we're looking at a number of reinsurance transactions, as you know, and we completed to and expect to complete several more in the second quarter, and when I say complete, I mean deals done and regulatory approvals filed and hopefully dividends received. We have the ability, and it shows in parent company cash, that we have liquidity from dividends already approved in excess of $200 million. We really have, if you look at it, five reinsurance deals keyed up. Some of them are pieces of companies like variable -- variable company -- variable annuity company. Others could be sale of an [enforce] block of business. They can generate and will generate significant cash as part of the 500 million, but we also have assets on the books of the insurance company that we don't think fits strategically, so some of those -- some of those assets will be sold at reasonable prices. It's interesting that as we go through this process, and we're selling off or reinsuring these assets, we're not incurring a significant book losses. We did take some losses this quarter on track leases, as Chuck Cremens has mentioned. But these transactions are done at reasonable prices. We pulled our variable annuity business off the market. I think Gary would say this, if I don't, we had a failed auction, didn't like any of the prices, still had a couple of bidders at the end of it, decided to reinsure a health block of business, Liz Jorgikopolis is taking a look at the business, and we'll figure out whether there's a sale possibility or not, but right now we're running that business, and in place of that, we have other opportunities to reinsure various blocks of business. We also have very old blocks of business that don't fit with our strategy that we may well be able to package and sell, and some of those aren't even in the numbers. There've been a lot of things done at the finance company, as Chuck said, and I think there'll be more of those. So the 528 is a number we're very comfortable with, and that'll all be cash in the second or third quarter, and we'll probably add to the list.

When you say you have other assets that the insurance companies that may not fit strategically, are you talking about certain blocks of business or are there other investments --

Well, it's a combination. It's a combination of things. We're scrubbing -- we're scrubbing the balance sheet down, and if something doesn't fit, and even if it's reasonably small, you know, we make a decision as a management team to either hold it or sell it, and if we can get -- if we can get reasonable value for it right now, we're paying the cash, because, as Gary has said over and over again, we're paying down debt. But we won't sell something, and Civic is the major example, if we think the market is giving us a really stinky price, we're not going to do that.

I'll leave you with just two last questions. First, there was a significant increase on the balance sheet with respect to reinsurance receiveables from year end to March 31st of about 900 million.

Yeah.

If you could maybe describe what that is, and secondly, with respect to further funds coming from the insurance companies this year, you've mentioned dividends north of 200 million. How much do you expect from surplus to venture payments both principle and interest?

I guess the surplus to bench is probably 100, 100-plus something, in that range, and the other question is the way we book the reinsurance transaction, for the Civic Life block and the Banker's Life traditional block, we have the reinsurance receivable reflects the balance there, and we also have the offset in other liabilities. We haven't, in fact, taken the investments or insurance liabilities off the books, but that'll happen in the second quarter, but all of the other income statement numbers are reflected net of the income and expense numbers related to those transactions.

But at the premium from those transactions is reflected in holding company cash?

Pardon me?

I said the premium from those transactions is reflected in holding company cash? There was a footnote that the cash proceeds from those transactions --

Those are -- the cash there is about, I think, 200 to 225 million, and it's a combination of things, but it's the dividends that have been approved by the insurance regulators to be able to take out and pass up to the holding companies, so some of it's that, and some of it's just ordinary dividends.

Okay. Thank you very much.

Your next question is from Colin Divine of solomon Smith Barney. Please proceed.

Good morning. I have three hopefully fairly straightforward questions. First, with respect to loss mitigation, I think you mentioned it was 3% this quarter. I believe that's on an unannualized basis, so it's a 12% run rate, and that was comparing to 1.3%, or 5.2 run rate, so it's still quite above where it was a year ago. Perhaps you could tell us what the impact on earnings of that was, because from what I understood from the K, you are then bringing interest current on these loans, and that would have impacted operating earnings so that's question one. And, as I say, 12% run rate on a portfolio your size still seems staggering, quite frankly. Secondly, if we could talk about the officers and directors loan program. I guess I'm curious as to why are you not booking the interest expense on those loans, because it's clear from the amount of the reserve you've put up that those people will not going to be able to repay the principal and yet you keep advancing them the interest that there's no way they'll be able to repay that, and why that's not really an expense to Conseco, and lastly, turning to the life company, on one situation the Trump Building, you noted in the K that you are not going to accrue investment income on that property this year, because I guess Trump doesn't have to pay you interest until the building's cash flows, did you accrue investment income prior to this, and if so, how much of that is added to operating earnings?

Jim Adams, do you have the answer to the building?

In the first quarter of '02, we did not accrue any significant amount of investment income on the Trump Building. We have in the past accrued income over the holding period. Which we expect --

How much was that?

Over the last three years, it's been approximately 7% of the overall investment.

Can we put some dollars on that, please?

Approximately $80 million.

You've accrued $80 million of interest that Trump's not obligated to pay you until the building cash flows, is that what you're saying?

No, he is obligated to pay us.

First of all, can I jump in here?

Yeah, go ahead. Yeah. Okay.

It isn't that Trump is obligated to pay us. We own this investment. And so, in terms of our ability to recover what is presently on the books, we feel confident about that. [ overlapping speakers ]

Not so confident you're confident about accruing more going forward, is that correct?

That was a decision made before putting this strategy in place. We run our books fairly conservatively, and at this point in time, we've decided to do it this way. Can I get the loss mitigation? You okay? You done with that one, Colin?

Yeah, let's move on to that one now.

Okay. Thank you. On the loss mitigation, I think you confused a couple of numbers. The 1.2% was the first quarter number in '01. The annualized number of 12% that you took was the 3% in the first quarter, so it would have been 1.2% in first quarter '01 versus 3%. No question --

Hold on. Hold on. Just one second. Just one second, please. Can we clarify, 19.2% was on a non-annualized basis, the K said you restructured 1.2% of the portfolio in the first quarter if I annualize that, sir, I get to a 5.2% rate. What you just said you restructured 3% --

Let me try to reconcile -- let me try to reconcile it for you and everybody else. In the first quarter of '01, we had a 1.2% loss mitigation number, all right, for that quarter, of '01. That is comparable to our 3% number as it relates to the first quarter of '02. The total loss mitigation for the full year in '01 was 8.8%.

Correct. But if you continue to loss mitigate at the rate in the first quarter of this year, you will loss mitigate 12% of the portfolio in '02, versus if we kept the same run rate from the first quarter of a year ago, it would have been 5.2%. Am I incorrect in understanding that?

No, I think you're arithmetic is correct, but your presumption may be wrong.

That seems questionable. Again we're sitting at 3%. But that's fine.

Well, let me -- let me -- [ overlapping speaks ]

-- what's the impact on earnings?

Let me try one other. To the extent we're seeing some hopefully, at least stabilization in our delinquencies, in fact we saw some material reduction in delinquency in the first quarter, I would hope that what will happen, and I think in part it's due to the economy is improving, that loss mitigation will, in fact, subside over a period of time. We would hope that would be the case. So I would --

Hold on. Hold on. how can - just time out here -- Loss mitigation is taking non-performing loans and making them current. Frankly, 3%, boy hope your delinquency number is coming down? Right? You just restructured the whole portfolio --

Is that a question?

Isn't that what you're saying you're doing?

I don't understand your question, Colin.

You're saying delinquencies are coming down, but is the reason they're coming down is because you're doing the loss mitigation and that's what's reducing it?

The way I would look at it is loss mitigation from the fourth quarter to the first quarter actually reduced a little bit. And as it related -- and as it relates to the materiality of the dollars that occurred in terms of delinquency reduction, it was substantially greater than any loss mitigation dollars.

Can we go to the D&O?

Go for it.

Colin, I don't want to speak for the past, but right now, the $40 million that was added to the D&O reserve to get it up to 460 is more than just a decline in the decline in the collateral we hold of Conseco stock, and, in fact, I did put -- I did put an accrual in there for interest, current interest, and some past interest, and also considered the earnings on the work-down plan, and I think going forward, we'll probably continue that practice. And I'd like to see the reserve go up.

When is this going to start coming above the line, because it's clear for all intents and purposes it is on balance sheet for Conseco, you will have to make whole, what, at the end of next year to have that facility repaid in full when it comes due, that seems to me then this is an operating expense for Conseco, not a below the line item.

Well, you're making the assumption that it will come due at the end of '03, and we're certainly working on getting that extended.

You mean that loan -- hold on. So we're clear. At this point in time, that facility is due December 31st of next year, is that correct?

That's right. The guaranty -- yeah, you're right. Yep.

Is there any reason I should expect that if you are able to restructure it that that will not become a direct obligation for Conseco? How can it not when -- what are you up to now for a reserve on this, almost $500 million?

I just said 460.

Sorry. I didn't catch that. Okay. Thank you.

I don't think there's any need to change the accounting. I think it's very clear, and I don't think it's confusing to anyone, and we're going to keep adding to the reserve as we see fit, and hopefully, you know, we won't see -- we won't see provisions due to stock declines, but we certainly will consider increasing that reserve if we think it's prudent.

Well, your reserve, it would strike me, will have to increase by at least as much as the annual interest, the case right now, if these people can't repay the principles, they can't repay the interest, we're looking at an ongoing reserve increase, is that unfair?

I don't think that's unfair.

Okay. Thank you.

Your next question is from Ira Zuckerman with Nutmeg Securities. Please proceed.

Yeah, just a couple of quick questions. First of all, on the insurance operations, in addition to what you reported on your -- on the long-term care business, there also appears deterioration in some of the other lines, specifically the specified disease, and I'm wondering if you can give us an explanation for that, and, also, are the deterioration of these lines going to have any impact in terms of write-downs of either goodwill, DAC or other assets?

This is Liz Jorgikopolis, let me take that one. The sort of bouncing that you see in first quarter versus prior -- you know, prior quarters, either fourth quarter or first quart, depending on what you want to peg at your comparison, in the various outside of long-term care, it's sort of natural bouncing. We have not seen any deterioration in experience over, you know, over a meaningful evaluation period in any of our other lines in business. In fact, there's a nice improvement trend in many of these lines, and so, obviously, the goodwill question is sort of not relevant at this point. These lines are very profitable, and we see some natural bouncing. You really need to do sort of a rolling 12-months or four-quarter, or something a little bit longer, to get a real sense of the trend lines in these blocks.

Yeah. The other question I had is on the finance company, you're significantly shifting the mix of business that you're doing. Is this going to have any need to have any restructuring in terms of expenses?

I hope if anything it'll have further reduction in expenses. Our objective here is absolutely to move towards quality versus quantity in the manufactured housing business, and so, you've seen a reduction in the origination there over last year, down to around 15% versus a little over 20% last year in terms of the percentage of origination, so we're trying to balance the overall portfolios and bring the manufactured housing down and increase the home equity and private label business, and we will continue to do that.

Well, is this going to mean you're going to have to make some more personnel expense cuts, and are there going to be any charges involved in that?

No, I don't believe so.

Okay, thank you.

I think we have maybe time for one more question. Do we have one more?

Your next question is from Daryl Wetloff, Laufler, Wetloff, Mason Funds. Please proceed.

I was wondering what sort of cash flow can we expect from the runoff of floor plan receiveables? And what is your expectation for net principle payments on the investing activities, cash flow line, for the year or however you want to define it?

Net principle -- the second question I didn't understand.

Could you expand on the second question while I think about the first?

The second question, I'm wondering what sort of cash flow can we expect from liquidation of receiveables, or are we going to expand receiveables over the course of the year? And then the first question was, you guys have basically gotten out or curtailed for the time being floorplan lending. I'm wondering what sort of net in-flow we can expect from that this year?

Well, our objective is to -- that business is under present restructure, and our objective is to continue to effectively liquidate the portfolio in terms of a major reduction. I think it stands somewhere today a little over $600 million in size, and I would think that by the end of the year, it would be down closer to a couple hundred million dollars. We do have capital in there, because there is leverage on that portfolio, net capital that will be freed up at the time of the -- at the time that we either refinance or liquidate the portfolio in total, and that would be into '03.

Okay. And the second part of the question -- the second part of the question, the gist of the question is, if you need to raise cash and you're a lender, why not just shrink the portfolio?

Well, from a finance company's standpoint?

Yeah.

Gary can certainly answer this as it relates to being in the finance business, but I think when you're in the finance business, you certainly want to be a growing company on those businesses that show good profit opportunity, because there are economies in that business, an it's one that we absolutely are directed at strategically growing our home equity and consumer finance private label business, and that's where we're going to go, and to the extent that we have nonstrategic businesses, which is what we did in the first quarter, those are the businesses we'll exit and redeploy the capital. Either for debt reduction or for growth in the other two areas.

Okay. And the bottom line of my question is, to be able to continue to compete and follow a strategy, you have to -- you have to be able to stay in the market. So, I mean, growing the business is irrelevant if, you know, you can't stay in business, so why not take advantage of the most obvious source of cash in a finance company rather than, you know, doing everything else, and what you've done so far is great, and I appreciate it but --

Well, we think we can juggle those balls. We certainly proved we had the capacity to generate cash in the first quarter and deal with the obligations of the corporation and still be able to grow our home equity and private label business, and we anticipate we'll be able to sustain that strategy. So we think we can do both.

Okay, great. Thank you so much for all your hard work.

Thanks for all the questions we've had this morning. If some of you had questions and didn't get them answered, you could contact either Tammy Hill or Mark Glovers on our staff, and they'll run them by us, and we'll be sure to get answers to you as soon as possible. So thanks again to our studio audience for being here today. We appreciate it very much. And thanks to all of you along the network line.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating, and please disconnect your lines.