CNO Financial Group Inc (CNO) 2004 Q3 法說會逐字稿

Welcome to 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 on 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 followed by a zero and the operator will help you. Thank you for your attention and here is Tammy Hill.

Good morning and thank you for joining us for Conseco's third quarter 2004 conference call. Before I turn it to Bill Kirsch and Gene Bullis, just a couple of reminders. We'll be referring in the call today to information contained in this morning's third quarter earnings release. You can obtain the earnings release by visiting the news center section of our website at www.conseco.com. We expect to file our Form 10-Q tomorrow afternoon, November 9. The 10-Q 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 those forward-looking statements. Please refer to this morning's earnings release and to our latest Forms 10-K and 10-Q for additional information concerning forward-looking statements and related factors. Now I'll turn it over to Bill Kirsch, our CEO. Bill?

Thank you, Tammy. I'm please to report on the results of our third quarter. For Conseco, this quarter was quite remarkable. While there's much work to do, we're making important strides in our quest to transform this Company to embody the operational excellence worthy of the additional ratings upgrades. I'll first discuss significant highlights of the quarter, then I will turn it over to Gene Bullis to discuss an overview of our third quarter financial results.

We delivered a solid quarter in line with our expectations, yet these result does not yet represent the real earnings growth and value creation potential of our company. The business plan we are executing is designed to build shareholder value and position Conseco for strong, profitable growth over the long term. Our top priority for the remainder of 2004 and all of 2005 is to make the investments and take the tough actions necessary to earn an A-category rating from A.M. Best as soon as prudently possible. Importantly, we know what needs to be done to earn that A-rating. And we are intensely focused on the five business priorities we believe are getting us there. Sales growth, systems simplification, operational improvements, expense reductions, and Sarbanes-Oxley compliance, all of which will be grounded in our basic principles of sound corporate governance and responsible business practices at Conseco.

We have already achieved the financial strength required to merit an A-category rating. In order to take the next step and achieve the A-rating, we actively pursuing operation excellence through each of our five business priorities. Today, we are coming together as an organization behind our focus on achieving operational excellence and sustainable, profitable growth. 2005 will be a year dedicated to achieving operational excellence as the foundation for driving enhanced performance over time. Conseco's mission is to be a premiere provider of insurance products to America's working families and seniors. Our team is working with purposeful urgency to transform weaknesses into strengths and to earn excellent insurance company ratings.

Let me now turn to our priorities and the progress being made. Our first operational priority is to increase sales. At Banker's Life there are two main drivers to sales performance: First we continue to invest in our captive distribution. The total number of Banker's branches is now 157. Second, we are investing in the productivity of existing branches. So far this year we have replaced 40 underachieving managers and recruited a steady stream of new sales agents. Importantly, the performance of new and replacement managers continues to exceed our targets. At Conseco Insurance, we're building for long term sales growth following our extraordinary double notch ratings upgrade we earned from A.M. Best in June. We are now more competitively positioned to compete for shelf space with independent agents, and we are starting to see the beginning of a sales rebound. Conseco Insurance Group's product portfolio is also getting a long overdue update with 10 new products expected to launch in 2005. These include the first new life annuity product launches in four years and the first new specified disease products in eight years. Strengthening CIG's distribution network is a top priority for us.

In health, recruitment of new IMOs is well ahead of plan and is the engine that will drive sales in the coming quarters. Through the first nine months of 2004, we recruited 54 new health IMOs, compared to 36 new IMOs recruited for all of 2003. In annuities, during the third quarter, we established a relationship with a key national partner that will help us recruit new IMOs and together with other key national and regional accounts, will provide national coverage for our products. And in life we are analyzing alternatives for rebuilding distribution. In short, at both Banker's and Conseco Insurance, our goal is to achieve steady, predictable sales growth across our product portfolio. Our sales results for the third quarter are spelled out and explained in detail in this morning's release. For purposes of this call, I will add only that we are not satisfied with our sales results and we are intensely focused on laying the foundation to build distribution and grow sales in 2005.

Let me know touch upon a few additional highlights of the quarter. First, key additions to management. This has been a high priority since August and we have already added significant new talent to our operating leadership. At Conseco Insurance Group we've added Steve Stecher, as Executive Vice President of Operations in IT. Overseeing both our operations and systems simplifications initiatives. Steve has more than 18 years of experience in operations in IT, and extensive relevant experience in restructuring and consolidating insurance company systems and operations. We've also recruited some top notch talent to fill other key roles at Conseco Insurance, including Peggy Hutchinson in Policyholder Services, and Andy Hern [ph] to lead the new Performance Management team. Peggy was previously responsible for policyholder services and operations at a major BPO site for CFC. Andy Hern has 18 years experience in process reengineering and change management consulting. At Banker's we promoted Scott Perry to EVP and Chief Operating Officer. In recognition of his talented successful management of Banker's captive sales force through Conseco's restructuring. Reporting to Scott is another new addition at Banker's, John Wells, who joined us in October as SVP of Operations. John comes to us with 25 years of insurance experience most recently at Mutual of Omaha. John has hit the ground running in our Banker's operations and has already recruited a new head of claims, who will be starting immediately.

Speaking of claims, fixing claims leakage in the long term care business is a top priority. As part of that initiative we have established a long term care service center in Ft. Lauderdale, close to the action, where we can provide focused monitoring and case management for a large number of our policyholders. We are very pleased with the work done by the head of our LTC closed block, Ali Nautalin [ph] to begin providing stability for a block of business that has historically been quite volatile. We mentioned in today's press release that Banker's has added 23 new sales offices so far this year. I'd also like you to know that the offices opened in 2004 by Banker's are running about 5 percent ahead of our new sales plan. Well targeted geographic expansion is a key part of Banker's growth strategy.

Another key development during the quarter is our favorable tax ruling from the IRS. As many of you know we announced during the third quarter a closing agreement with the IRS on the tax treatment of the loss on our investment of Conseco Finance Corp. Under the terms of the closing agreement, the IRS agreed with the Company's conclusion that the loss should be treated as an ordinary loss for tax purposes. And also agreed that the amount of the loss before reduction of tax attributes is 6.7 billion. This agreement means that future qualifying taxable income can be offset by the loss on CFC. We are pleased that as expected, the IRS confirmed the tax position that we had taken on this issue and at a dollar amount consistent with our business objectives. Needless to say, much thought and planning went into this tax position and we are delighted to see that it was responsibly implemented.

Conservation efforts. That's the name we have adopted to manage -- actively manage our in force business. We are making the preservation of our profitable in force an even higher priority today. We have begun to put plans in place to expand an effective annuity conservation effort, and to roll out similar initiatives in life and Medicare supplement. Finally, in highlights of the quarter, we had a very productive meeting with A.M. Best. Glen Hilliard, Gene Bullis, Lowell Short and I met last month with A.M. Best to outline our plan for achieving operational excellence. It was an extremely productive meeting and we're pleased to hear from Best that our program and our five operating priorities lineup precisely with what Best is expecting from Conseco in order to consider further upgrades. Best told us that they are truly comfortable with my management transition announced in August and that the transition does not slow our momentum toward future upgrades. Our upgrades are in our own hands and we are intent on earning those upgrades through achieving operational excellence.

Let me touch now, briefly, on cash flow and our strong capital position. Our businesses are continuing to generate capital and cash flow in line with our business plan in amounts that significantly exceed our debt service requirements at the parent company. We expect to use a portion of this excess cash flow to further reduce debt and will use the balance of our excess cash flow to invest in our business. I intend to continue to remain overcapitalized until we achieve investment grade ratings from all relevant rating agencies. Let me now talk a little bit about ROE. We recognize that return on equity is a key performance measure for the investment community. Our current ROE levels are being pressured in part by our current low leverage. Debt-to-total cap was under 19 percent at September 30, 2004, as compared to an industry norm for our peer companies at 25 to 30 percent. Over the longer term, as we restore our investment grade debt ratings we expect improvements in ROE to come from reduced cost of debt and leverage more in line with that of our peers. ROE over the next several years should also benefit from greater efficiencies, improved product margins and profitable growth in new sales. We expect over the next several years our ROE will build gradually, in a step function rather than in a hockey-stick-function to a level worthy of an excellent insurance company.

Let me now turn to guidance for 2005. Based on our progress, we are confirming our most recent earnings guidance for the full year of 2004, which anticipates that net income applicable to Common Stock for the fourth quarter will be in the range of 63 to $68 million. We're currently in the process of preparing our operating plan for next year and will provide a range of guidance for 2005 when we report earnings for the full year 2004. Based on our planning work to date, at present, we know of no reason why the consensus estimate for 2005 of $1.71 per share will not fall within our 2005 guidance range. As I said at the start of the call, my number one priority will be to make the investments and take the tough actions necessary to earn an A-category rating from A.M. Best as soon as prudently possible. To that end, 2005 will be a year dedicated to achieving operating excellence as the foundation for driving enhanced performance over time. We will continue to focus on the five biggest drivers we believe are key to creating the strongest possible platform for growth, profitability and shareholders value over the long term. There will, inevitably, be bumps in the road, but we will handle each one as it comes to deliver long term value to our shareholders. With that, I'll turn it over to our brilliant CFO, Gene Bullis, and then we'll come back to me to make some concluding comments.

Thanks, Bill. Just a few comments on the quarter before turning it back to Bill and opening up for questions. As detailed in this morning's press release net income for the third quarter was $57.9 million or $0.36 per diluted common share. Our book value per share on September 30 was 1825 excluding other comprehensive income under FAS 115. Make an added a comment on specified disease loss ratios and our third quarter reserve adjustment. As we noted in this morning's press release, we had an adjustment in the third quarter, which had the effect of increasing our specified disease reserves. It's important to note that the adjustment was not due to adverse morbidity or poor claims experience, rather the item essentially relates to a change in lapse assumptions. The total pretax earnings impact in the third quarter from the change was approximately $4 million. The reserve component of this change had the effect of raising the third quarter reported loss ratio on specified disease to approximately 77 percent. We believe that a normalized run rate for our specified disease loss ratio is between 67 and 70 percent before interest income adjustments.

Investment income for the quarter relative to yields and new money rates just a couple comments there. Low interest rate environment continues to apply pressures on our margins during the quarter. As we noted in this morning's press release, we had a couple of items which had positive impacts on investment income during the quarter offsetting some of this pressure. A combination of prepayment income on commercial mortgages and mortgage backed securities and favorable income on nontraditional investments contributed approximately $7 million to pretax income during the quarter. Our average portfolio yield decreased slightly from 5.62 percent at June 30, to 5.60 percent at September 30. During the quarter, our average new money investment rate was 535. During the quarter, we took advantage of an opportunity to reduce our exposure to mortgage-backed securities with unamortized premium by selling these investments. Which we deemed to be of the susceptible to early prepayments. I'll now turn to back to Bill for closing comments.

Thank you, Gene. The last analyst call we had was in August of '04 when the Board announced my election as Conseco's new CEO effective immediately. For me, it seemed like a lifetime ago that we had that call. That call gave rise to some very good questions and much has happened since then, most of which has been very good for Conseco. This is our first opportunity to answer many of the good questions that were raised back in August of '04, and subsequently. And I'd like to address three of them right now. First, my election as CEO does not portend significant legal or operational problems for Conseco. Second, I was not hired to liquidate Conseco. And third, I am here for the long term and committed to transforming Conseco into an industry leader. Knowing that actions speak louder than words, I hope our performance this quarter, together with my comments for the remainder of '04 and '05 outlook helps answer a lot of these questions and many more.

Finally, I would like to address questions arising from the recent industry investigations that rocked the insurance industry. Our stock price was hard hit and many questions had been raised by analysts and investors about Conseco's business practices and were those business practices identified in the New York Attorney General's civil complaint filed against Marsh an indication of problems at Conseco. I take very seriously Mr. Spitzer's questions as to why companies do not ask the tough questions themselves about their business practices. At Conseco we are asking those tough questions. We have recently completed an initial internal review of our business practices and market conduct. That internal review has found no issues, violations, or concerns. In addition, we have hired Simpson, Thatcher, & Bartlett to perform and independent review of our internal investigations, and to make any recommendations they deem appropriate to help Conseco embrace best business practices on a continuous bases. We've not received any subpoenas nor regulatory inquiries in connection with the NYAG investigation and have no reason to believe we will; however, if we do receive a subpoena or inquiry, we hope we'll well-positioned to demonstrate we've effectively policed ourselves in a manner consistent with good corporate governance. With that I'll open it to Q&A.

[Operator Instructions]. Nigel Dally, Morgan Stanley.

Thank you and good morning. First question just on this statutory earnings, looks like they're a little bit light this quarter, fell about -- just over 30 million sequentially, and if we could get some additional color on what was driving that decline and what we should expect the statutory results over the remainder of the year? Second, the persistency related charge in specified disease, any other blocks of business where persistency is also coming in above expectations where we should be concerned about potential reserve strengthening? And then just lastly on the expenses, can you just remind us what level of operating expense reduction you're targeting for 2005? Thanks.

Well, this is Gene. Specifically on statutory earnings we continue to target our EBIT essentially on a stat basis which is -- represents statutory earnings before deductions for interest on surplus debentures and fees payed up to the insurance companies of between 250 and $300 million for the year, and we're very comfortable that for the year we'll end in that range. The results for the quarter were unaiblely [ph] affected the adjustment that we made for specified disease, in fact, had a greater impact on statutory than GAAP. A couple of other catch up adjustments in the quarter that we think are relatively non-recurring but the kinds of things that normally happen in statutory accounting. Relative to specified disease, certainly we have blocks of business that have -- that are lapse supportive in the other direction, certainly long term care. Specified disease is a business that is priced in a way, that frankly, you win when you -- when it lapses and you win when it persists. Because of the nature of the business. So this restoration of some policies that we had previously estimated were not in force putting them back on the books through a reinstatement process and change in estimate will favorably impact the future profitability of the block, but we had to put reserves back on the book in order to get there. We don't think it really has an impact on the overall operating performance or loss ratios underlying the block.

Thank you, Gene, and I would like to comment on the last question which is expense reduction targets for '05. And I just need to take the position that we are working on our '05 operating plan currently. And we are not in a position to discuss anything about '05, other than what has already been said on this call and in our earnings release.

Okay. Perhaps if I could just follow up on a different angle? The Sarbanes-Oxley expenditures which you made this year, I would guess that some portion of that will be ongoing but a large portion will be non-recurring? Is it possible to break out how much of your expenses are related to Sarbanes-Oxley, which should be one time in nature?

Sure. This quarter in particular we're working on a meaningful push to comply by year-end. And as such, we have brought a lot of talent on to campus. There are -- we don't have a current tabulation of the costs through the quarter. Last number I heard was in the neighborhood of $15 million of compliance costs so far this year, and a meaningful portion of which has been capitalized but a meaningful portion of which was expensed in the second and third quarter, particularly in the third quarter; and we are happy to continue to be reporting earnings in line with our expectations, even after absorbing those additional costs for Sarbanes-Oxley.

That's great. Thanks a lot.

Andrew Kligerman, UBS.

Good morning. A couple of questions, I guess aimed at Conseco's brilliant CFO. Anyway, the first question would be with respect to your prepayments. You had 4 million in gains on that, can you remind us of how much of the portfolio you restructured? And, then, maybe comparables in the last two quarters. I believe there were losses in the last two quarters. And then I have a follow up question or two.

Prepayments have an impact on yield. We had -- relative to expectations, we were unfavorable in the first quarter by -- in the 7, 8, $9 million range. I don't recall the specific number. Relative to our expectations in the second quarter, it was pretty much on the expectations --

It was sort of a flat quarter?

Yes, in second quarter. And third quarter, we -- relative to the net amortization of premium and discount number, that turned out to be favorable for the quarter by approximately $4 million. That related principally to the prepayment on commercial mortgages that were on the books at a discount to par. We also had some other gains in investment income relative to nontraditional assets, another $3 million or so that I would expect to be non-recurring.

And how much of the mortgage-backed portfolio was restructured? Just to refresh my memory on that.

During the quarter, I would guess it's between 3 and $400 million.

Got it. Okay. And then just moving on to the redundant systems, I believe that it was stated seven would be -- it would be reduced by seven this year and seven next year. What's the starting point? Is it 26 systems currently? Or is it -- what it the beginning of the year? Can you tell us what the starting point of those sevens are specified in the release?

I'd like to invite Steve Stecher who I introduced earlier in this discussion our EVP Operations in IT at Conseco Insurance Group to answer that question. Steve?

Yeah. The number of major policyholder systems that we had in place was 33 at the beginning of the systems simplification effort. Six have been reduced so far to date, which brings us to 26. And another -- seven are targeted for retirement by the end of this year. And you're correct, seven additional are targeted for next year.

So that would get you down to 12?

That's correct.

Okay. Finally, the Med sup loss ratio is about 70-plus percent at Banker's. I think most companies want to be around 65. Is that the objective? And if so, how soon to get there?

Well, our objective is to achieve our -- our internal rate of return for the product which includes some elements of income statement below expenses. We're quite productive and we have a substantial block that we're able to execute at scale. We do have a mix of our Med sup business portfolio at Banker's. About 20 percent of it is product that is marketed and sold on a group basis, which has a little bit higher targeted ratio than the statutory ratio for individual. 75 percent. So we would expect Banker's loss ratio to normalize higher than what an individual Med sup ratio would normalize to. So you're somewhere between that 65 to 70 range when you weight it for the group component.

Are you happy at this level? Or do you want to get it down a little bit? And if so, how much?

It's -- from a financial point of view, I'd love to get it to maximize it, you also have to consider pricing relative to competition so that there is a trade-off relative to the size of the book. We could price it -- price it higher and, perhaps, have less production and more lapses. So generally, we're happy with where we are.

Got it, thanks very much.

Vanessa Wilson, Deutsche Bank.

Thank you. Just -- Nigel's question about the statutory earnings, when we look at your statutory surplus this quarter it's essentially flat with the second quarter. Did you actually make a capital contribution this quarter since you had a net loss?

Since we had a net loss?

You had a net loss of 49.5 million.

That was because we took out surplus debenture interest. We did make a capital contribution this quarter which is one that we had planned to in our capital plan anyway that was targeted for -- to ultimately true up Banker's RBC at a 250 range, which we thought was important for our overall capital planning. So we did make a $50 million capital contribution for the quarter. Or that we planned to for the year. And it's reflected at the quarter-end.

So Banker's is at 250 and, then, the other relevant RBC ratios, do you have those already?

We're just over 300 on a combined bases.

On a consolidated basis it's over 300?

That's right.

Okay. And that's why you think you're at the A-Best [ph] rating, is because you're already at that level?

Yeah. We continue to be very satisfied with our capital position and things are operating generally within our expectations. We expect that we'll end the year where we expected to.

Okay. And then, my second point is really a request more than that question. I guess the last assumptions are quite important here in terms of the fundamental picture on the loss ratios, could we get some detail on those, just on an ongoing basis when you're ready to give us what you're tracking? Just so we can kind of see how the trends are going, since they do make the loss ratios kind of volatile?

Yeah. We'll think about that and consider that request.

Okay. And then, my last question is: with respect to the NOL, what are the next steps? Is there an accounting event here where your balance sheet will change? Is there another go-round with the IRS which will change the complexion of where you are?

There are -- yes and yes. Right now, we're in the process of a program called a request for technical advise and that request is in connection with our -- the audit of our 2003 tax return. That technical request has been prepared and submitted and is going through the processes that the IRS goes through to -- for the national office to provide advice on technical matters that the field auditors raise in the context of an audit. That technical advice, I think as we've described before, involves the question of the 382 limitation on the NOL, as well as the timing of the loss. And the third item being the -- whether or not it's a life or nonlife deduction. Those items will proceed through the process and we expect to get an indication of the IRS's position sometime in, probably, the third quarter of next year. But that's -- again, it's subject to the IRS's schedule and not ours. Relative to the accounting question, we'll take under advisement the position on the valuation allowance in connection with our year-end audit and consider whether or not it would be timely or appropriate for us to reverse any of the valuation allowance at 12/31/04.

Okay. So the balance sheet event is a year-end event, and then the life/nonlife deduction is a 3Q '05?

At the earliest.

Okay. Okay. Great, thank you so much.

Tom Gallagher, Credit Suisse First Boston.

Good morning. A couple of questions. First, on -- back on the statutory earnings. Gene, you had mentioned that the reserve increase on specified disease had a greater negative impact on stat -- statutory results. Could you just quantify that or give us some idea what our magnitude -- how much bigger that would be over 12 to 6 million?

Another 10, so it's about 16 million.

Okay. Thanks. So that is -- all else being equal should be considered non-recurring on a stat basis?

Yes.

Okay. The next question is: You had over $30 million in realized losses. Can you just give us some idea of what was happening there with those credit impairments? Did you recognize losses on the sale of bonds?

Tom, this is Tammy, and I'm glad you asked that it because it kind of goes back to Vanessa's question a little bit as well. Looking at the supplement, the 34 million of net realized losses, that did not all go -- or hit stat cap and surplus because it essentially reversed in -- the change in unrealized. We had some partnership-types of investments that we marked down through unrealized and we went ahead and recognized the losses for stat this time, so the net impact on cap and surplus wasn't that pronounced. The other thing I would point out about stat-net income is we're still paying a fairly high rate of surplus debenture interest to the parent, which you also see on the -- on the supplement that we did for this morning. The run rate for the last few quarters has been about $52 million and that compares to what would be a normalized run rate of about 11 million. And the reason we do that is it's very efficient for tax purposes for the consolidated group. But that's what was going on with those realized losses, but that was not a direct hit to cap and surplus because it came back through as a positive in changed and unrealized.

Okay, but Tammy, can you give us elaboration on what was driving --?

Yeah. It was a few partner -- it was a few type of non-traditional types of partnerships and things you don't have the same phenomenon on GAAP, because all of those would have been marked-to-market for fresh start.

Got you. Okay. The next question is: I guess your debt is down to 789 million. And Bill, you had mentioned that the plan would be to continue to pay down debt as well as invest in the business, can you just give us some idea, let's say by maybe year-end '05 where you think that comes down to?

We'll take the next question from--

Hang on a second, operator. We still owe Tom an answer. Just a second.

We're trying to be caution you about specific comments about '05 until we complete our business plan.

Right.

I guess we'd rather defer that until the next call.

Okay. But would the game plan here to be -- to get, maybe -- let me ask it a different way. Debt to capital is 19 percent now?

Yes. Slightly below.

Okay. Where should we expect that to bottom? If you can answer that question?

Depends on the timing of the rating upgrades that we're geared for, and the amount of liquidity that we have. So it's really a decision that we'll make continuously.

As I mentioned, I will continue to run the business in an overcapitalized mode until we achieve investment-grade ratings. And since we cannot predict when that will be, it's hard to answer where our debt to equity ratio will bottom out.

I got you. So -- all right. So, there should be a correlation between reducing debt and potential ratings upgrade?

That's right.

Okay. And then I guess another question is just on long term care. Can you give any updates on potential plans to raise rates on either in force for new sales there?

Sure. I'm glad you asked that question. In that way. Because that's exactly how we look at it. We are in the process of filing to obtain approvals to raise our new policy rate at Banker's and we expect to role those new policy rates out in early '05. And of course that's at Banker's. However, both at Banker's and in our closed block, we continue to believe that our current modeling is appropriate on the in force and that we do not foresee any in force increases for '05.

Got you. Okay. And, Bill, can you give some quantification of the rate increases that you're filing for at Banker's in terms of new business?

Well, as you know, it's a competitive market and I would only say that we're going to raise it as much as we think the competition will bear and still allow us to have a fighting chance at not having the kind of experience that our competitors who have previously raised their new rates have suffered. So I'd rather try for competitive purposes not discuss that right now. But we are very keenly focused on what the right level of price increase should be.

Okay.

And again, one of the themes you'll hear is it's a careful balance between getting the price up you know to a point where the market will bear, but at the same time, we want to do it in a way that will put us in the best position possible to mitigate the adverse impacts of a price increase; namely, a meaningful slowdown in new sales of the product.

Got you. Okay. Two other quick ones. Gene, in light of the fact you're restructuring -- I guess, your high premium MBS or selling those off, rather, and because I guess we've started to see some prepayments on commercial mortgages, is it fair to say that the current low interest rate environment will not remain the headwind that's it's been?

Actually, interestingly enough, when we restructured the high premium MBS portfolio, we were able to buy low premium MBSs, so we managed to recycle it, essentially without a significant change in quality with a slightly graded duration. So I guess from that point of view, we've taken some risk out of the portfolio from a -- an amortization and premium point of view, so all things equal that would be the case.

Okay. And then just last question is: In terms of fixed annuity sales I know that's where all your growth has been for the time being. Can you comment on where you think you're writing returns from an ROE standpoint and what type of guarantees are underlying those products?

We're in the -- on the second part, we're continuing to market at 3.25 with a series of filings that would lower the average guarantee rate down around 2.5 by the time we exit the year.

I presuming of course we're talking about Banker's?

Yeah.

Right.

We're selling very little fixed and very little annuity production from Conseco Insurance. From an ROE point of view, we're -- given that overall pricing we're probably not achieving our ultimate objective of a 12 percent internal rate of return, that would translate into a slightly different ROE. So we're probably somewhat below that but we're still generating appropriate returns at that pricing, and we would expect that -- the changes that we've made to improve returns and gets back closer to the targets.

I would also like to hitchhike on the comment briefly, which is to just make it clear to people that while we have an ultimate target of -- ROE target of 12 percent on most products, we need to be sensitive to the fact that as a B double plus company, we need to be slightly more competitive to maintain our sales momentum than some A-rated competitors that we meet in the marketplace. And so until we achieve our A-rating on certain products like annuities, we'll be pricing below 12 percent and unfortunately, many of our competitors are already pricing below that in any event. So we're in the range of, you know, 10 to 12 percent ROE across the product spectrum.

Okay. Thanks.

Jukka Lipponen [ph], KBW.

Good morning. First of all, am I correct in looking at the current earnings run rate around 39 to 40 cents, excluding the re-organization charges and the benefit in the investment earnings?

Yes.

Next year you're reiterating the $30 million cost save guidance?

Yeah. We're certainly--

Yes.

-- not changing that.

And then your comment with respect to the consensus estimate in '05 being -- likely being within your guidance range. What kind of a share count are you thinking when you make that comment?

Right where we exited the quarter in the 189 million on a fully diluted basis.

Okay. And then in terms of the A.M. Best rating, I know you can't estimate exactly when and what might happen, but can you give us some color in terms of like when would be the full review that you would go through with A.M. Best? Is it after you finish the year and have the earnings?

That's a very good question. We asked that question of A.M. Best and they were very candid with us. They took with great care the double upgrade that we earned in June of this year and given the stable outlook that they mentioned at the time, we are now being told by them that once they move a company to a stable outlook, they don't consider additional rating upgrades before a 12- to 36-month timeframe. So they don't really want to even think about a future upgrade for us before that timeframe. So we will plan on meeting with them sometime in early to mid '05 and lay out for them our plans for operational excellence and put together a road map of what we would like to achieve for ourselves to essentially achieve operational excellence and then we will want to set out on achieving that in all of our actions. So hard to say anything more than that. But they have -- they were very clear with us that the timeframe is 12 to 36 months.

And then one last question. Can you give us some color, I think you've said previously that the ramp-up of the Banker's Life, the new offices usually rains from 18 to 36 months. Can you give us some color in terms where you are with the new offices that you've opened up in that time frame?

Well, we have our own internal plans for mapping those offices and in the aggregate, we are 5 percent ahead of our internal plans. The best office we've opened is in Hawaii, and it's currently running at $125 thousand per month of nap.

Thanks very much.

Thank you.

Beth Malone, Advest.

Thank you. Just a couple of questions. On the loss ratios, they ticked up just a tad between second quarter and third quarter in a number of the lines of business. I was wondering, do you -- is that related to the fact that new sales have been relatively slow? And when you start to see those sales pick up from the new products introductions, we should see those loss ratios start to come down again?

I think to be a little more specific in the which line you're discussing. The answer really changes from line to line.

If you look at -- I guess in the press release at the Bankers Life & Casualty ticked up a little bit quarter-to-quarter sequentially.

On Med sup?

On Med sup, yes.

Yeah. Most Med sup rerates are done annually at the beginning of the year, so you do get that impact more -- you know, it starts out earlier in the year and then starts to tick up as the year progresses.

And that would be true for Conseco Insurance as well?

Generally true for Conseco Insurance.

Okay. So the trends that you're seeing are not -- wouldn't indicate to you that there's a deterioration in the book of business you've got?

No, not at all.

Okay. All right. That's helpful, thank you. Also, on management changes that you're making out in the field with Banker's and Conseco, you talked a lot about, you know, branch manager changes and you've got some very strong capable people running the IT part. What do you think -- how long or when can we anticipate that there might be more of the more senior level marketing people coming into the organization? And are you planning to do that? For both Banker's and Conseco?

I'll take that. That was a -- I don't know if other people are picking up an echo on this call, we seem to be. We are very happy with the talent we have on the field. We are always looking to upgrade that talent as you can tell by the recent additions that we've made. We are always looking for more senior-level marketing people and we hope to be opportunistic in taking advantage of any opportunities that present themselves to upgrade our talent on the sales and marketing side.

Okay. And also, as regard to A.M. Best rating, it sounds like you're going to be holing -- most likely, have a B plus plus rating for all of 2005 it sounds like, and you're introducing a lot of -- it sounds like a lot of new product at the beginning of the year. Are those products kind of angled towards the understanding that you're going to be trying to market these products to a customer base or to an agency base that recognizes that you're not an A-rated carrier as yet? Do you have to make adjustments or do they have to be a little bit more competitive as you mentioned? Are you looking at your product development with the expectation that you're not going to have -- you're not going to be able to introduce those products in an A-carrier?

Absolutely. We're looking at the product development in the short term and long term kind of phase I and phase II horizon. Our phase I horizon prior to achieving ratings upgrade will be fully cognizant of the reality that we will be selling as a B double plus company, and we are, you know, going to be investing in our product rollouts in a way designed to address that reality. Phase II we're already working on additional products that we hopefully will be able to hit the market with at the right time. And at the right price. That will essentially be a -- a series of products that will enable us to ramp up quickly once we get the A-rating. So that we're not wasting six months in product development once we get our A-rating. But bottom line is we're intent on achieving our A-rating by doing those things we need to do to be an excellent company and right now we're defining "excellent company" within the context of B double plus, and we're going to be the best B double plus company out there, and when we get our A-rating we'll hopefully have no loss of momentum but rather be able to capitalize on the momentum instantaneously.

Okay. Thank you.

Mark Finkelstein, Cochran Caronia.

Hi, good morning. Couple of quick questions here. You talked about launching new products in specified disease in 2005 and I'm just curious if the new lapse assumptions were factored in your filed rates, and how do you expect the loss ratio in new business to look? Are you -- do you project that to be still in the 67 to 70 percent?

Some products have been filed and some products are yet to be filed. But we don't see any underlying change in our persistency relative to that book of business.

Okay. So the blip in the reserves in the current quarter related to higher persistency isn't going to have an affect in the terms of pricing or margin?

No it isn't. That's right.

Okay. Perfect. Second question, can you just talk a little bit about the competitive market for Med sup? We're hearing more and more about how competition is intensifying in this? And as you go into '05, can you just talk about how that's going to affect your pricing and potentially margins on that book?

Well, we have to talk about in terms of Conseco Insurance Group as well as Banker's and at Conseco Insurance Group we have a strategy which we're rolling out to address the competitiveness of the market without impacting our in force, and at Banker's, we're just going to continue to try and take advantage of the differentiated strategy that our captive agents have been using successfully in '04 to continue to sell Med sup successfully.

Okay. One final specific question. Going back to the Med sup loss ratios in the Banker's channel, one competitor noted a spike in frequencies of claims in the quarter. I'm just curious if you saw any similar trends?

No. We see -- there's a gradual increase in severity, but no change in frequency from our point of view.

Okay. And I guess actually one final question. In terms of prepayment income I know you've repositioned the portfolio a bit, but what do you think a normalized level of prepayments, kind of in a stable interest rate environment might be going forward?

I don't think we even could pretend to answer that. If we knew that we're probably be in the wrong business.

Okay.

Because that's a function of so many things.

Okay. Fair enough, thank you.

Karen Lamark, Merrill Lynch.

Good morning. A couple questions. First on the Florida long term care business can you give us an update about how the solicitations of your policy holders are trending in terms of the options and maybe some assessment of a -- preliminary assessment of the financial impact you expect? I then I've got a follow-up. Thanks.

Yeah. Everyone knows severe weather in Florida has delayed the notice and policyholder options selection process. We are committed to making the process as clear and as smooth as possible for the home health care policyholders in Florida. We have discussed the process with the Florida Insurance Department and we expect to complete the notice process in the first quarter of 2005 to accommodate the disaster that had visited the state earlier this summer and fall. We, then, should have a reasonable read on options selected by the end of the third quarter of 2005.

That's helpful. And then secondarily. Bill, I think a couple of times you mentioned taking tough actions, can you give us a little bit more color about what that might entail or what you were referring to? Thank you.

Sure. Well, tough actions some of them are popular; some of them are negative. But there are many of them underfoot. One is to try and do everything we can to improve our conservation efforts and that's a lot of hard work. Number two, systems simplification involved a lot of hard work. And lot of moving pieces. And you know certain things come out of those efforts which lead me to realize that we are not best-suited to manage this company for quarter-to-quarter earnings. But rather for the long term. Because when we confront issues that come out of a systems conversion or conservation effort, we're going to deal with them and in a very prompt and appropriate manner and if that has an impact on a quarter, we're going to deal with it. And not try to put it off. You know, third, we're going to be looking very hard at claims leakage. That, obviously, is tough to do. We want to strike the right balance between, you know, being a very sensitive to the needs of our policyholders and their claims, we want to pay them every dollar they're entitled to. In a timely and responsible way. On the other hand, for the benefit of all of our policyholders, we need to make sure we do not overpay any claims. And those decisions are very, very hard. A final example would be on expense reductions. For us to achieve the expense reductions that we currently have scheduled, that will involve a lot of painful actions and a lot of tough decisions. And we're going to make them for the better future of our business. And the -- and better shareholders value over the long term.

Great, thanks very much.

Thank you.

Felice Gelman, Sunova Capital.

I think you have answered all my questions, so thanks very much.

Thank you.

Thanks, Felice.

You can't always underwrite the answer.

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

Richard Haydon, Omega Advisors.

I'm still awake.

Do you have a question, Richard?

Can you hear me?

Yes.

For those of us that are interested in cash earnings, could you tell us what the cash taxes were versus the GAAP of 36 percent?

I would say cash taxes are probably less than zero.

But that's a great question. I ask it every week myself.

Because, well, you know, you paid, what? 60 cents in cash taxes -- excuse me, you accrued 60 cents in cash -- or GAAP taxes in the first nine months, so the cash earnings are substantially higher. Is it --?

Yeah. I think, Richard, you'll see in the Q tomorrow, I think Gene's right. I think it actually is less than zero. There might have been a very, very small refund if you look at the cash flow statement but it was essentially nothing.

Take into consideration the $6.7 billion, what would be the implications on the balance sheet for tangible net worth?

We still have as you can see from the balance sheet that we put out in the release, we have, approximately, 785 million of goodwill at the end of the -- at September 30 and there's another, approximately, $150 million in miscellaneous intangibles. The extent to which we could replace that with deferred tax assets that would increase our tangible net worth for a dollar for dollar basis.

So it'd be fairly significant?

Yes. It'd be almost a $1 billion.

Anything else, Richard?

We've lost him.

Rich, you still there?

I'm still here. Thank you.

Thank you. Good. Good. Well with that, I thank everyone for their time and attention this morning. Those were some excellent questions and in particular we are thankful for your continuing support. As shareholders we are determined to make this a rewarding long-term investment for each of you and with that, we'll end the call. Thank you so much and everyone have a good week.

Ladies and gentlemen, thank you for joining us on the call. You may now disconnect.