CNO Financial Group Inc (CNO) 2003 Q3 法說會逐字稿

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 press star 0 and an an operator will help you. I would like to advise everyone this conference call is being recorded. Thank you for your attention. Here is Tammy Hill. Ma'am, please proceed.

Thank you, operator. Good morning and thanks very much for joining us for Conseco's Third Quarter 2003 Conference Call. Before I turn it over to Bill and Gene, I want to make a couple of reminders.

We will be referring in the call today to information contained in our third quarter earnings release. You can obtain the earnings release by visiting the news center section of our website at www.conseco.com. We will be filing our Form 10-Q later this afternoon which will also be available through links contained on our website.

The forward-looking statements being made today 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 10-K and 10-Q for additional information concerning the forward-looking statements and related factors.

Now I will turn it over to Bill Shea, our CEO. Bill.

Thank you, Tammy. Good morning and thank you for joining us today. With me is, as Tammy already said is, Gene Bullis, our CFO.

We have been looking forward to this call since this is the first opportunity for us to talk about the company since we emerged from bankruptcy a couple of months ago. I want to make a few comments about where we are today and where we are going. Gene Bullis will go over some of the financial highlights from the quarter, and then we will open it up for questions.

We have accomplished a great deal over the past few months, and certainly over the past year or two, but we still have a great deal of work to do. Our number one priority is getting our ratings back. With a close second priority being to reduce the cost of our capital structure, which is closely tied into the ratings picture. Both the bank debt and the convertible preferred are expensive pieces of capital, and are designed to be refinanced. What we go after first will depend on the state of the capital markets and on which strategy will result in more favorable rating action. We continue to look very hard at our expense structure, and we are doing a lot of work in our operations areas to consolidate systems and to improve our levels of service to our policy holders and agents, and there will be much more to come here as we move forward as a company.

Just a note on our balance sheet. We are very comfortable with our fresh-start balance sheet. We believe that we have net operating loss carry-forwards for tax purposes of over $3 billion, which will reduce goodwill significantly over the next several years.

As we pointed out in yesterday's press release, had we recognized the value of our deferred tax assets on our fresh-start balance sheet, we would have no goodwill. Since we are not able to recognize the deferred tax assets, the tax savings going forward will reduce the goodwill balance and most likely eliminate it. This all depends on how much money we earn.

As a management team we are focused on rebuilding statutory capital, and we've been -- we will be singing this tune for quite a while, and it's really the key driver in getting our ratings back. We are extremely pleased to report that our combined risk-based capital adequacy ratio at September 30 was 257%, which puts us within our targeted long-term operating range of 250 to 300%. And just for comparison, and it was in the press release, we're at 166% at year-end 2002.

Another thing we were very concerned about but are very pleased to report, how well the majority of our captive and independent distribution channels held together during the parent company's bankruptcy process. We are especially proud of the performance of our career distribution force at Bankers Life and Casualty, which generally maintains sales levels year-over-year despite the downgrades. We also appreciate the patience and loyalty of our independent distribution partners at Conseco Insurance Group. Even with the decreases in new business resulting from last year's ratings downgrade, and I think this is really important, our collected premiums were down only slightly for the first nine months in our core product lines. And as we noted in yesterday's press release, we feel that we have a solid collected premium base to grow from as we begin to get our ratings back going forward.

We also want to thank our other key constituencies. Employees, policy holders, and particularly the regulators for their cooperation during what was a very difficult 12 months. The patience and hard work has paid off. We plan on proving over the next few years that it was all worth it and that a vibrant and profitable insurance company has emerged from the process.

One recent development that just happened was the Texas Department of Insurance has rescinded our formal consent order, which is another positive sign that the company is really making great progress.

And now I'll turn it over to Gene Bullis to good over some of the financial highlights for the quarter. Gene.

Thank you, Bill.

Just a few key comments, first of all, on the fresh-start balance sheet. Under fresh-start accounting, our capital structure and resulting common book value are effectively set by the plan of reorganization approved by the Bankruptcy Court. As such, our agreed upon enterprise value at our emergent state is 3.8 billion and consisted of 1.3 billion of bank debt, 860 million of convertible preferred stock, and common shareholders equity of book value of 1.64 billion.

Value of policies in force was 2.8 billion at emergence. As most of you are aware this asset is required to be established under fresh-start accounting rules and represents the discounted value of projected cash flows from all of our existing insurance business on the books on the date of our emergence. We used a discount rate of 12% to value this asset.

Goodwill, which falls out of the balance sheet from the fresh-start accounting process, totaled approximately 1.1 billion on our emergence date. As Bill mentioned earlier the size of the goodwill asset is a function of the fact that we do not recognize any deferred tax assets in our fresh-start balance sheet. If we had not set up a valuation allowance for our deferred tax assets goodwill would have been zero.

The fresh start adjustment to our insurance reserve totaled approximately 2.1 billion. This increase was due to two primary drivers. The current lower interest rate environment, which impacts the discount rate used on virtually all of our reserves, and the mark to market adjustment on our long-term care liabilities. Of the total mark-up of 2.1 billion, approximately 350 million related to interest rates, an additional 1.2 billion related to long-term care reserve liabilities on Conseco Insurance Group's acquired blocks. The two months results for July and August under historical accounting was a net gain of 2.2 billion which included approximately 2.2 billion in net gains from the various restructuring items.

Loss ratios on long-term care for the two-month period were 167%, which included claim reserve strengthening of approximately $80 million on Conseco Insurance Group. We have been conducting an extensive review of Conseco Insurance Group's acquired blocks of long-term care business with the help of outside actuarial consultants and we have had various discussions with state regulators regarding premium rate increases where appropriate and other corrective actions. We are also doing extensive work in our claim adjudication area to ensure that claim payments and benefit periods are proper and in accordance with terms of the policies.

After the required mark to market value on long-term care reserves at emergence projected loss ratios on existing long-term care business are in the range of 100 to 120% at Conseco Insurance Group and have 65 to 85% at Bankers. These ratios exclude investment income earned on reserves. Loss ratios in our other supplemental health lines of business were relatively stable during the third quarter and were generally within pricing expectations.

Net income for the month of September under fresh-start accounting totaled 18.9 million after dividends on convertible preferred stock.

With respect to guidance, on earnings, we expect year one GAAP net income to be in the range of 175 million to 200 million after convertible preferred dividends and excluding any realized gains or losses on investments. Our historical target -- our initial target, targeted ROE, is 9 to 10%, and we are initially targeting annual growth and net income of between 7 and 10%. The growth in net income is expected to come from a combination of new sales and reductions in operating expenses.

A few comments on statutory earnings. As a management team we will focus on and talk a lot about statutory earnings because that is what rebuilds capital adequacy and that is what drives cash flow capabilities and coverage ratios of the holding company. Our statutory operating earnings before realized gains and losses totaled 222 million for the nine months ended September 30, 2003. 180 million increase over the same period in 2002. 2003 nine-month results include several positive income items resulting from our completed sale of the General Motors Building. The General Motors Building gain, along with our statutory operating results, helped push our combined RBC ratio up to over 250% at September 30, which was up from 166% at December 31, 2002.

Our statutory operating earnings combined with fees and interest paid by the insurance companies to the parent company are expected to provide annualized cash flow capacity, or are currently providing annualized cash flow capacity from our insurance subs of over $250 million a year. We expect to leave a significant portion of that cash flow capacity down at the insurance company level in order to fund future growth.

Our annual debt service requirements for to 2004 and 2005, including principal and amortization, are approximately $153 million a year.

With respect to the NOL, we are currently in the process of finalizing our net operating loss carry-forwards calculations for federal income tax purposes. The majority of this expected NOL carry forward resulted from the recent sale of the assets and liabilities of Conseco Finance Corp. Based on the work completed to date we expect our NOL carry forward will total approximately 3.6 billion and be available to offset portions of our consolidated taxable income over the next several years.

With respect to the investment portfolio, we are comfortable with our investment portfolio today. We had more than our share in the past of fallen angels in nontraditional investment losses but we have worked very hard over the past year or so to clean up the portfolio and significantly reduce the overall risk profile. As you will see in the details of our 10-Q our below investment grade assets are down to 4.2% at September 30th. The overall average credit rating of our portfolio was single A, and we have very little exposure to equities.

Thanks, Gene, and now we will open it up to your questions.

Ladies and gentlemen, if you have a question or a comment please key star 1 on your touch-tone telephone. If your question has been answered or you wish to withdraw your question please key star 2. Again, star 1 for questions. Please hold for your first question. Gentlemen, your first question comes from Tom Gallagher of Credit Suisse First Boston. Your question, please.

Good morning. Question on the loss ratio and long-term care. Saw the sequential improvement and realize that in the first few months of the quarter you had the reserve true-up, but can you just comment on what the trends have been in terms of claim recoveries and also new claims submitted and how that's actually been trending?

The rate of claims submission has been trending relatively stable. I would say somewhat down in terms of reported claims, though severity increased a bit. We're very comfortable after having completed this strengthening in August and modeled back the impact of having pushed that strengthening back that the benefit ratios are stable and we understand them very well.

Tom, I would just say that we have looked in a very aggressive way at this whole long-term care block at Conseco Insurance to make sure that we're doing everything we can to fix this block of business. As you know, it was largely acquired, over 92% of what we have on the books down here was acquired blocks, and, you know, we're doing everything to make sure we understand it not only from an accounting point of view but to fix long-term care in Conseco Insurance as a business. And as you read in the press release we stopped writing new policies and don't intend to write new policies at Conseco Insurance in the long-term care. But at Bankers, we have a block that was grown policy by policy, and we believe that that business is well understood, and we're going to grow that intelligently, but hopefully there will be more coming about what we expect to do from a business point of view to cap and solve our long-term care issues at Conseco Insurance.

Okay. And then just a follow-up. Where do you stand in terms of the business with the much higher loss ratio, in terms of getting rate increases?

Yeah, you're talking about long-term care specifically or all lines?

Long-term care specifically.

Long-term care, we're in the process of negotiation. We will go after maximum rate increases where we participate in the business, and that's pretty much all states, and we have been in active negotiation with the divisions of insurance and, in fact, we have pushed along rate increases, and we expect to negotiate some sizable ones going forward, but that will not solve all of our issues in long-term care, so we're in negotiations to make sure that we do everything we can to completely manage the block. So it won't just be rate increases but it will be other things, including maybe replacement policies.

And do you have any indication at this stage as to potential level of the increases?

It will be significant. I don't want to say right now what the percentages are but they will be very healthy. I would like to ask one clarification, Tom, and that is, what did you mean by claim recovery? I'm not sure that we've specifically answered that, but I'd like to you kind of clarify that for us.

Sure. Just curious how your claims adjudication or claims recoveries have been trending for long-term care and whether or not you think there's significant opportunity on the claims recovery side with the loss ratio.

Yes. We certainly have spent an awful lot of time and effort on claims adjudication. We're in the process of making sure we have a first-class process. We're not there yet. And I think what you'll see is much improved claims adjudication that I think will prove itself out in the numbers over the next several years, but it's something that we're paying attention to. We have specific projects keyed up internally and we will be able to tell you how we're doing going forward, but we expect significant improvement in that area.

Thanks.

Just a little bit of a follow-up. It's important that we continue to differentiate between the long-term care block at Conseco Insurance and the long-term care block at Bankers, which are fundamentally different in terms of underlying loss ratio, performance, adjudication, and, frankly, price increases. We don't believe we would have the basis for a price increase in the Bankers block. The experience wouldn't support it.

Thanks.

Thank you, sir. Your next question is from Tom Purcell of Viking Global.

Congratulations on completing the process.

Thank you very much.

I had three questions, actually. One was the -- you had said that the stat earnings were 220 million inclusive of the GM sale and some other stuff. What was it excluding the GM sale? That's the first one.

The second one was, just looking at the release, in terms of the fully diluted shares, I assume that the entire difference is related to that preferred, and you had said one of the goals was to refinance the capital. Is it your expectation that the preferred, if it is and when it is refinanced, it would be refinanced with another convertible type of instrument?

And the last one is just on the loss ratios. The loss ratio for the month of September was 96, then I thought I saw in the projections that you thought it would be 100 to 120. So why was September better than when it should be going forward, or am I not understanding something there? Thanks.

Want to hit them one at a time? The stats earnings without the gain?

The impact of the GM building that flow through stat earnings as opposed to directly through surplus is just under 200 million. Just -- sorry.

Is that, then, 20 a run rate for stat earnings ex the gains, or were there some other offsets?

We had significant long-term care reserve strengthening stat basis in several quarters of -- basically in all three-quarters of 2003 on a stat basis. That would be well over 100 million of reserve increases for the nine-month period.

Tom this, is Tammy, the 80 million that Gene mentioned earlier in the call of the reserve strengthening was a stat hit as well.

Just in the third quarter.

Right, right. I got it.

Okay, why don't we hit the refinancing.

This is Dan Murphy, Treasurer of the company. From a refinancing perspective, we are looking at -- our main concern is making sure that the leverage does not increase. So when we look at refinancing the preferred stock we are not only looking at refinancing it with a potentially some time of convertible preferred but any other type of equity like instruments including equity that will give us equity credit from a rating agency standpoint.

Tammy, why don't you hit the loss ratio.

Yeah, Tom, I think your last question was, we had roughly 96% in the month of September, and we talked about it's projected at Conseco Insurance Group of 100 to 120. First of all, the 96 is blended and includes Bankers, but also the reason that over the next few years both all the projected loss ratios on long-term care go up is because that's a simple loss ratio calculation that's just benefits expense divided by premium and it excludes the net investment income. So in general that ratio on long-term care always tends to go up as the business ages.

Okay. Is it -- I guess as I look at that particular line of business, intuitively if I see a higher benefit ratio my guess is then until the rate increase is, you know, kick in, and I know you can get a certain amount per year as you go forward, that the earnings from long-term care itself probably are going to be either down versus September or stable. Is that probably right, then the rest of the stuff grows?

I think stable would be fair. But again, in fairness, and this is why we pointed this out in the press release, the mark to market that's required by fresh start ended up bumping reserves up for a little bit, so we went through and changed all of our assumptions and we factored in reasonable rate increases that we think we can get, but not overly aggressive, but I think stable would probably be fair.

As a threshold issue, I would caution everybody that trying to understand an income statement for an insurance company for one month is a bit of a stretch. We believe that the month is representative, but, you know, any minor adjustment in a single month can be offset, you know, one way or the other in a subsequent month.

Sure. Okay. Thanks a lot.

Thank you, sir. Your next question comes from Andrew Hoyn of Paulson Partners.

Good morning. I had question for you, a little follow-up on the diluted shares outstanding that was asked before. Is that solely all come from the convertible preferred, the diluted share number?

Yes.

And how is that calculated?

This is John Kline, the Chief Accounting Officer. The way we did it, the actual conversion feature is going to be determined based on an average, which is -- we calculated starting in a period just -- that started just a few weeks ago. What we use is the average price during the month of September to calculate the conversion price and divided that by the par value.

And so you said the pricing period started a couple of weeks ago. What exactly is the pricing period and how is that determined?

It's 60 days out. It's a function of the actual convertible document itself. It started 60 days out from emergence, I think it was November 8th, it was Monday, November, and it's a 60-day period, so it runs through January 7 or 8, I believe.

60 calendar period?

60 calendar day period, right.

So right now we're in the middle of the period that determines the shares?

Exactly

When exactly is the preferred convertible?

It's not convertible by the holder until September 30, '05, and it's callable by the company at any time at par.

And callable, you plan to do that by refinancing, you said, through another type of equity?

I think Bill mentioned that's one of the pieces of capital we're looking at.

My understanding is the senior, the secured debt, won't allow you to pay any cash pay on a refinance convertible.

That's correct.

Okay. Thank you.

Thank you, sir. Your next question is from Jukka Lipponen of KPW. Your question, please.

Good morning. Couple of questions, first of all, what are the restrictions on dividends from subsidiaries?

This is Lowell Short, Senior Vice President, Finance Division. The only restrictions we're going to have going forward are prior notice. Under the previous consent order, dividends outside the insurance group were subject to prior approval. As you know, all extraordinary dividends by insurance companies are subject to prior approval. So obviously we are subject to that as well. But ordinary dividends going forward, we are subject only to prior notice provision.

And what are the normal state depending on the subsidiary state of domicile?

Well, our top tier insurance company is domiciled in Texas.

Right.

So any dividend that would go outside of the insurance group would go through the Texas subsidiary and therefore be subject to Texas notice or approval.

Okay. In terms of the earnings per share calculation, if you take -- I can't get to that number using the numbers that are in the press release. How do you get to that number?

Add back the convertible preferred dividend.

Yeah, it should be net income before the preferred -- if you look at basic earnings per share you would look at net income before preferred dividend and then for the diluted it would be net income applicable to common stock dwided by fully diluted shares outstanding. There will be a schedule in the 10-Q that will come out later today that will wake you through that calculation.

Okay. And in terms of management incentive comp programs are you willing to discuss those at this point?

Yeah, I mean, certainly we have a management incentive plan that was negotiated with the old creditors committee and it was discussed and negotiated. Certainly intently when we were in that process. The new board has taken that up through the compensation committee, and the plan in its broadest context was 10% of equity broken up two-thirds stock options and one-third restricted stock, give or take a few shares. It's a 10 million share pool that we're in the process of discussing with the compensation committee and the board on how we should begin to allocate that, you know, given a lot of consideration of where we want to take this company going forward. And those discussions have been very fruitful and very soon we will have the right answer, and I think we'll have aligned the goals of the company, the board, the management team, as well as employees, behind a plan that we think will make this company very successful. So we're very pleased with the management incentive plan. I think it gives the employees, all the new -- some real new life here to move forward and make sure that we create value for the shareholders.

And last question, can you discuss in more detail the assumptions that went into calculating your long-term care reserves?

Well, you know, I would prefer not to do that on the call. What I'm trying to say about the whole block of business, which is some 450 million in premiums, and just so we're really clear, there's about 450 million of premiums at Bankers Life. I think the best way to put it, and then maybe after the call we can actually get into a little more detail, but we're taking a thorough look at our long-term care business at Conseco Insurance.

We had outside actuaries come in and do a thorough review of every part of that business, every individual block, every type of policy. They went away and did an independent valuation. Our internal actuaries were very involved. We have a management team set up to look at claims adjudication, to look at the whole process of administration around claims, payment of claims. We're in the process of making sure we understand that.

And as I said, we're also in negotiations with various divisions of insurance to make sure that we get maximum benefit from them based on the type of policies and also the type of experience we've been having in a couple of key states. That process is well underway.

We've also taken the opportunity to split out long-term care as a separate segment at Conseco Insurance, and it will be operated on its own separate P&L, so it will get great visibility inside the company as well as transparency to everyone outside the company. We have a management team focused on long-term care, headed up by one of our Executive Vice Presidents, so at this point I would say from a business point of view, we've done everything we can. We have the programs in place to make sure that we not only mitigate the losses, but my goal would be to make sure that this business runs off without impacting our capital.

And we're not going to say that it's going to be a business that's going to be additive to our earnings, but I don't want to the negatively affect our earnings, and this business was a terrible drain on this company since it was acquired in 1996. It should have been fixed before, but now we're making sure that we're doing everything we can to fix it. From an accounting point of view we feel very comfortable that where the reserves are set fully reflects the business and the condition of this block.

So I think without getting into the individual details of the calculation, from a overview point of view and what senior management has focused on, I think I'll try to explain that way.

Thank you.

Your next question comes from Rosemary Mirabella of A. M. Best. Your question please.

Actually, I think my questions were answered. I just want to know a little bit more about some of the assumptions that were built into some of the projections on the long-term care business, but as I think Gene just talked about, that will probably be addressed later on as the company goes through their processes.

Yeah, Rosemary, that's absolutely true. We will be very transparent about that. We have been asked many questions about this block of long-term care. Everyone knows where it was acquired from, and our intention, as management, as of -- as I've already stated several times, is our intent is to make sure that it's fairly stated, the block is fairly stated in every way on our books and records but also that we solve this block from a business point of view and not allow this block of business, which is clearly been a very, very bad performer to, affect the rest of our policy holders and our company. The regulators have been very supportive in that understanding, and I expect to have some announcements specifically related to the long-term care business in the very near future.

Okay. One point of clarification which I just want to make sure I understand, is in terms of, you know, the embedded problem, that's already been marked to market as part of the fresh-start accounting process, is that correct, as it relates to --.

Yes, that's right.

As it relates to long-term care.

That's right, yes.

So it was your best and most current assumptions at the time did you the fresh-start valuations.

Absolutely. We made sure that we did that very carefully, very meticulously, and we can say that with all of the information we have, that we've been very careful in making sure that if that is fully reflected in our financials. Beyond that is the business fixes that are underway and they're certainly substantial, they involve not only fixes internally but also we expect regulatory relief to make this block at least neutral to this company going forward.

Okay. Thank you.

Thank you, ma'am. Your next question comes from Gabriel Schwartz of Raymond James Associates. Your question, please.

Good morning. Just to follow up very quickly on that, then to get on a different topic, in setting that, or increasing the 80 million reserve -- I don't remember the rules, to be honest with you -- are you assuming rate increases in that number?

No, the 80 million relates to claim reserves.

And had nothing to do with future policy benefit reserves?

It's not the active life reserve, it's the claim reserve.

Very good. Then just on a different topic, you got your NOL, which I think you said was actually over 3 billion.

Yes.

Goodwill of 1.1 billion, and so those should even out. How is that going to work in the future? It will not take down the reported tax rate, it will go directly against goodwill? Is that correct?

That's correct.

So we're just going to see a full tax rate.

That's correct. In addition, when you see the Q, you will notice there are additional deferred tax assets for which we provided an allowance in addition to the goodwill. So our total valuation allowance is approximately 2.4 billion and that's a tax amount, not a pre-tax amount. That would be a contingent asset that would could think about its relationship to the goodwill number.

And if the 2.4 billion, which I refer to as tax tax, if we are able to sustain all of our arguments with the IRS, and even if we don't, there's reversing timing differences that will affect goodwill and reduce it, but if all win in our favor we would certainly be reducing goodwill as we earn money year after year. That goodwill certainly could go to zero, then it would reduce additional intangible assets, and given the large number, if it's sustained, then any additional amounts that are earned would go to additional paid in capital. Once we get the rulings from the service, statutory capital will grow for every piece of the NOL we're able to recognize. We believe that we have very strong reasons for getting the service to agree with our positions. We hope to be able to get those rules by say the third quarter of '04. I think we've publicly said August. And we're certainly going to take a tax return position to save the cash as we go forward, and, you know, we believe we've got all the appropriate advice and expertise behind us, and we believe we have some solid reasons for expecting to get some or most of it.

Okay. Then just to quickly, quickly go back to the long-term care, it was mentioned kind of a break-even result. That was just for the Conseco Insurance Group.

That's right.

So Bankers should be profitable.

Bankers, I want to emphasize that Bankers is a home-grown block of business, very carefully underwritten, you know, we believe it's a block that can continue to grow. It's never had a rate increase. We don't think one is necessary now. It's been a very stable block of business, and it continues to be so, and we believe we can grow that intelligently and make money. Very different situation at Conseco Insurance, largely purchased blocks of business that were troubled when we got them.

Wasn't there an announcement that you were getting out of LTC?

Yes, we announced in April of this year that we were not going to write any more long-term care business at Conseco Insurance.

All right. That's where I misunderstood. Thank you very much. I appreciate it.

Your next question comes from Steven Eisman of Chilton. Your question, please.

Hi, congratulations again for emerging from bankruptcy.

Thank you.

I have a question on the accounting, and maybe this is expressing my ignorance of the ins and outs of fresh-start accounting, but in reading the bankruptcy document, no mention was made about a reserve to the long-term care, which I think is probably new information for most of us, yet the book value of the company is the same as it was estimated previously, so there had to be some offsetting something, somewhere on the balance sheet, to offset the $1.2 billion reserve hit. Where was that?

Well, Steve, this is Tammy, if you noticed in the original bankruptcy document, in the pro forma from last year, we had an increase to the reserve I think of a billion six that was fresh start, and the actual on our effective date in early September was, I believe, 2.1 or 2.2 billion in total. So there was definitely some incremental increase to the reserve between those two, and some of that was related to the experience we've had on long-term care since then, but some of it was also related to additional decreases in interest rate. But we did have a fairly sizable increased reserves in those old pro forma's that were part of the bankruptcy document.

Where is the offsetting item --.

Part of the offset was the Good Guy and the GM building.

All right.

I think the GM building valuation in there was like 1.1 billion or so from a year ago, and we ended up selling it for 1.4 billion.

One other question. In terms of calculating back value per share, why is it being divided by the basic shares --.

Well, because the book value numerator we're using is the common book value. If we wanted to use the total equity we would divide it by the -- in other words, if we added back the 800 plus million of convertible then we would divide it by the fully diluted share count.

Thank you.

Your next question comes from Ron Macintosh of Caston Associates.

Two quick questions. I think you mentioned 250 million of dividends available to the holding company. I'm guessing that's a proxy for stat earnings but it's also got some fees in it. Could you break down what the operating earnings versus the fees would be in the 250, then related to that, is that 250 million, I'm assuming an after-tax number, but is it also a pre-tax number, i.e. we assume the NOL's will allow us not to have to pay any cash taxes?

That does not assume out of the box utilization of the NOL, so it really is an after-tax number. The amount of the fees that gets to be a little bit more complicated to answer because it affects -- it depends on the timing of when we pay interest on surplus notes. But it is -- so that is a number that is before fees.

And how much in surplus notes is in that stat capital number?

About 1.1 billion, just over a billion or so.

Perfect. Thank you.

Thank you. Your next question comes from Albert Rosano of Circle T. Your question, please.

Hi, my question was mostly asked and answered. Could you repeat again on the tax issue, you're not going to pay -- you're going to report on your statements a tax rate, a corporate tax rate, but you're not -- on a cash flow basis your cash earnings are higher because you will be withholding the cash until August of next year, and you get a final decision from the IRS?

That's right. We're going to take a tax return position and assume that we're going to get the benefit of the NOL's and hopefully, as I said, by August of '04 we'll have the rulings we need, so the tax returns position will allow us to keep the cash and hopefully keep it for good.

Assuming complete success, in your dealings with the IRS, what would you expect your tax rate to be through the total utilization of your deferred tax assets?

Well, because of the way we have to account for the benefit, the tax rate is going to be 36%.

Assuming your successful August of next year, thereafter you will be reporting what? 0?

Same. 36%. The offset of that will go against goodwill rather than going through the income statement.

I see. So -- you're always reporting on your income statement the 36%?

That's right.

But as we said, and I want to be careful about this, we believe that if we keep earning the money that we hope we will, or do better, goodwill will continue to be reduced, could be reduced to 0, and given the level of that, assuming what you said, that borrowing is falling and we're 100% successful we could see additions to paid in capital, but it's all going to be a function of how much we earn and I don't know if we mentioned this, but there's a 20-year carry-forward of the NOL's. Converting the capital loss from the finance company into an ordinary loss instead of a five-year carry-forward we'll have a 20-year carry forward, so we expect to be able to use the NOL's for the foreseeable future on a statutory basis, as I already mentioned, it just gets, as we utilize the NOL, we increase our stat capital.

Hello?

Hello.

Just a suggestion. In future press releases maybe a line on cash EPS would be helpful for analysts to highlight that cash impact of your tax situation. Thank you very much. Thank you.

Your next question comes from Andrew Gunlack of ING. Your question please.

Good morning and congratulations. Most of my questions have been answered.

Thank you.

Let me just ask one other quick question. Do you see yourself running the investment portfolio any differently now that you're out of bankruptcy than throughout the process and how you've run it the last few years?

I'll take the last few years then I'll turn it over the Gene for how we're going to do it going forward. One of the obvious issues in this company was the investment portfolio. One of the things we've worked the hardest on. I probably don't need to remind anyone that we took 860 million of realized losses over an 18 to 24-month period.

One of the things we jumped all over them when we first got here was the investment portfolio. It's been changed dramatically, certainly helped by the market, but also helped by, you know, being very hard-nosed about what we needed to get out of, chip sizes of various investments and all of that. Gene Bullis is involved with Eric Johnson in making sure we have an investment portfolio that mirrors the kind of company we are. We want to do a better job matching our assets and our liabilities. We think we can do more with the portfolio, but going forward, I'll turn it over the Gene.

I think in terms of our investment strategy and risk profile, as we've said before, our primary -- our dominating objective here is ratings. And the issue relative to restoring our ratings to investment grade really require us to keep the risk profile on the -- and asset quality at its highest level, so we will continue to operate that portfolio with that primary objective in mind. Obviously, there's a trade-off between risk and yield, and we will -- we believe that we have certainly the opportunity to make the yields we have in our models with that strategy, and we'll continue to manage to it.

What's the average duration now, roughly?

Probably mid 6's on both sides, the assets and the liability, in that range.

Last question, if I just, on the taxes, it sounds like you are going to operate the company assuming that you will get a favorable ruling from the IRS, and should you not get it sometime in '04 you will owe some back taxes. Is that a fair way of stating what you're doing?

Well, just for the '04 return, and we would have the ruling prior to filing of the '04 return, so I don't think that that would necessarily be a real issue.

Good. Thanks very much.

Your next question comes from Gabriel Schwartz of Goldman Sachs. Your question, please.

Just one quick question on the NOL's. Can you just clarify, do you have any clarity on the loss from the CFC sale, whether that's going to be life insurance income -- or a life insurance loss or a non-life loss?

That's one of the issues that we are working on. We believe that we have a very strong position relative to it being a life insurance loss that will be subject to subsequent review of the Internal Revenue Service.

So out of your total NOL's, just over 3 billion, how much of it do you actually have clarity that it's a life insurance loss?

The clarity will come when we actually file the return, because the loss is being created principally in 2003. We have a strong position. We think that we've developed a tax strategy that delivers that outcome, and it remains to be seen.

Okay. But do you have any -- in terms of NOL's prior to '03 are there any that are life insurance losses and how much?

Approximately 200 million.

Thank you. Your next question comes from Paul Slotto of Marion Polk Investments.

You show a risk-based capital number of 257, and what number in a simple-minded fashion would be required for an A rating from A. M. Best? And the second question, you show on the income statement approximately 13 cents a share for taxes, but if your tax position is upheld you don't actually pay that, and I understand you're going to keep reporting income tax expenses, if you're fortunate you won't actually pay, and doesn't this place you at a competitive advantage to other companies that, you know, report income tax and actually to have pay them?

Relative to the first question I don't think there is a single point question that would be appropriate and it would be taken out of context even if there were because there are many other factors for ratings other than RBC. Certainly there are thresholds for maintaining ratings and perhaps different thresholds for increasing ratings, so it's kind of a complicated question. Relative to taxes, one would say that perhaps with our tax position we would have some pricing power, but I don't think you could make a direct map of that from our premium rates to others.

I wasn't thinking about premium rates, I was thinking about an actual meaningful performance to an investor, because you're going to be reporting lower net income than you're receiving in cash for maybe 20 years.

Yes. I thought you meant competitive advantage in the marketplace.

I might just say, in terms of AM Best, our number one priority, as I mentioned is, to get our A category rating back. Certainly to have Moody's and Standard & Poor's start increasing our ratings. We want to be investment grade as soon as we can. We're meeting with A. M. Best and the rating agencies in the near future. We're going to do everything we can to push that forward.

We look at a lot of things, debt to capitalization ratio is very important, and that's why we're certainly interested in changing our capital structure. One, because it's expensive, and two, because we want to get our ratings back. So that is an integral part of it.

As far as RBC goes, you know, we really need an A rating and strong RBC to make sure that our distribution is doing everything they can for us in terms of selling our products, so it's really a lot of things, but we're going to keep pushing that RBC higher, and operate in a 250 to 300% band, and certainly we're thinking higher than 250, and I would expect that at some point, hopefully in the near future, that all of this will be recognized by A. M. Best and the other agencies and they will start moving us up. The sooner we get an A category rating, the sooner we're really back in business. And we think because of the demographics and the kinds of products and service that we're in ta we have a chance of putting up some good numbers in this company.

Thank you.

Your next question comes from John Goldberg of Hahn Capital Management.

My question had to do with the earnings per share, but that's all going to be explained in the Q, I'll wait for that. Did you say that the final decision on the IRS ruling would come on or by August of next year?

Well, we're hopeful it will come -- we hope it's going to come by August.

But could it come sooner than that?

That would be great. We're hoping sometime in the third quarter, you know, we'd like it tomorrow. But we think that's a reasonable date and we're going to make sure we keep pushing for it. But clearly we want to have it before the end of '04. The sooner, the better.

And where will the cash go in the meantime on the balance sheet that you're not paying in taxes? Is that the restrictive cash account, or where can we see that?

Oh, it's not cash. It's -- essentially it would create a provision, a liability account.

Okay. Thank you.

Thank you. Your next question comes from Ron Bobman of Capital Returns. Your question, please.

Hi. Thanks for your patience in answering a lot of questions. I've just got a few remaining. The balance sheet has a significant reinsurance receivable. I'm wondering if you could give us some color on the spread of receivable by sort of credit rating, some insights there. Is that a gross number, or is it already net of a provision for uncollectability, and is it a discounted number?

This is John Kline. Under GAAP accounting we're required to gross our balance sheet up. So all of our reserves that are seeded, they're not netted with a liability account, they're actually shown as an asset and also included in the liability as well. The vast majority of our reinsurers are A-minus rated. If you're interested in seeing the major reinsurers that we deal with, they are scheduled out in our last 10-K in the Item 1 Disclosure and there haven't been any significant changes to that list.

Is that number the 933, net of a collection provision?

We have no reinsurers that we have any doubt of collecting the amount due, so there aren't any provisions for adverse collection in any of those amounts.

The guidance that you provided, does that assume that you are successful in using your term, neutralizing the Conseco Insurance book from sort of an earnings volatility perspective and does it also assume an upgrade to the A category by best sometime sooner rather than later, or is it assuming that you're staying where you are, rating-wise?

Well, it assumes that our fresh-start accounting adjustments that were made with respect to the long-term care and the projections that derive from that will be consistent with our experience. With respect to ratings in the short-term, it's difficult to imagine how a rating, even within 2004, would have a significant effect on operating profit, since new -- the biggest impact would be on increasing new annualized premium, and that's certainly relative to our total collected premium, that's a relatively small number.

Understood. And if you will oblige me my last question, do you have a stat net income for just the first month?

No.

And it's important to point out, there's no such thing as required fresh-start for stat. So we don't have a cutoff on stat. Stat just kept going along on its normal quarterly reporting basis.

So you just close your books quarterly?

Yes.

Okay. Thanks a lot, and good luck.

Thank you.

Thank you. Your next question comes from Brian Warner of Performance Capital. Your question, please.

Hi. Question has sort of been answered, but if you could just clarify as it relates to your tax situation and the NOL, assuming you are successful with the IRS, what would be the actual cash taxes that the company would pay for the foreseeable future, post receiving that ruling be, sort of as a percentage of, you know, pre-tax income, I guess?

Well, the ruling has several complexities to the, so it's not just a single-point question. It depends on, in fact, how those NOL's will emerge. There are certain issues regarding 382 limitation, so it's a difficult question to answer. I think over time you can pretty much map. Since our only source of income is insurance income, that our actual taxes paid would be quite nominal.

So in your guidance where you're assuming a 36% tax rate --.

Yes.

-- what are your actual tax requirements assuming you're successful?

You mean in terms of cash or --.

Yes, cash.

Well, I think what Gene just said is that the actual cash payments will be pretty minor, assuming that we get 100% result. On the balance sheet, what that will do is it will start reducing goodwill from a stat point of view it will be -- it will increase stat capital. So it's a fabulous result for us. We want to be a little careful that we don't say that we're only going to pay, you know, 5 or 10% cash of our taxes, because there are some complication that, frankly, you'll read about in the Q, but as I would echo what Gene said.

The cash payments will be nominal if we get 100% solution, which is a terrific result for the company. I mean, we were at one point looking at capital losses from the finance company that were astronomical, with a 5-year carry-forward, and we believe we have absolutely good solid positions to be able to take this as ordinary losses, and, therefore, save the cash and reduce goodwill and build capital. So the cash out the door with 100% solution will not be very big, and, therefore, the company will be in a very strong position.

I think what it also echo's is that our goodwill is something that is there because we can't set up deferred taxes, and that we believe we're going to save cash and build capital and not have goodwill that will be questioned at all because of all the things that are happening.

And we do expect a significant solution from the IRS. This is not something that's wishful thinking. Whether we'll get 100% or not is yet to be seen. We don't want to wait until the IRS audits our tax returns five or six years out, so we're pushing for this fast-track solution which we hope to come by August.

Operator, I think we have time for one more question.

Thank you, ma'am. Your final question comes from James Ramenda of Northington Partners.

And naturally, a tax question. The $13 million tax expense would have led me to think goodwill would go down by 13 million in the month but it went down by a lot more, 167 million. Was that due to the monthly change in mark to market or something else?

Yes, that's exactly right.

Then I have a follow-up on the statutory side. How much of the NOL -- first of all, how much are they on a statutory basis, how much exists in the statutory entities, and how much is admitted versus non admitted? As asset.

That's a couple of questions that I think that sort through. First of all, a substantial portion of the NOL arise as a result of this year's operating results, and we haven't completed the year yet or filed the tax return. Relative to NOL's prior to 2003, there's approximately 200 million of NOL associated with our insurance companies that is available from 2003 and forward.

Is that 200 million measured on a GAAP or stat basis?

That's the same basically

So when you look in your stat links there's probably something like a $200 million deferred tax --.

No, first of all, 200 million is not a tax asset, it's the amount of the NOL.

What is the amount of the deferred tax asset that, I guess, is not -- partly admitted and partly not admitted in your stat statement? And I guess that number will change a lot is what you're telling us, as this year comes to a close?

Yes.

The stat rule for deferred tax are much different than GAAP. You're not permitted to recognize deferred taxes on a stat basis unless you can basically show they're going to be realized in a one-year period. So it's much more restrictive.

Also, there are a lot of elements to our stat deferred taxes beyond the NOL. There are significant differences in reserves between tax and stat. Our deferred tax -- admitted deferred tax asset at the end of the third quarter is about $100 million.

Okay. Thanks.

That concludes your Q and A session. I'll turn the program back to your host for closing remarks.

Thank you everyone. We hope we answered your questions. We thank you for your calls, and your questions, and at this point we'd like to conclude the call. Thanks a lot.

Ladies and gentlemen, thank you for your participation in today's teleconference. This concludes your presentation, and you may now disconnect. Have a great day, everyone.