CNO Financial Group Inc (CNO) 2004 Q4 法說會逐字稿

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

Thank you. Good morning and thanks for joining us for Conseco's fourth quarter 2004 conference call. Before it turn it over to the management team, just a couple of reminders. We will be referring in the call today to information contained in this morning's fourth 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 10K on Wednesday, March 16. The 10K 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 this morning's earnings release and to our latest forms 10K and 10Q for additional information concerning the forward-looking statements and related factors. And now I'll turn it over to Bill Kirsch, our CEO. Bill?

Thank you, Tammy and good morning. I am pleased to report another solid quarter of financial results. Yet, I am even more pleased that the Conseco team, in 2004, delivered impressive results in each of the following important transformational events and initiatives. First, completing our $2.4 billion financial restructuring. Second, delivering a record sales year at Banker's Life. Third, entering into the IRS closing agreement. Fourth, demonstrating compliance with the internal control standards required by Sarbanes-Oxley section 404. Fifth, implementing 7 administrative system conversions. Sixth, accelerating our progress towards operational excellence. Seventh, accelerating expense reductions.

In a moment, our CFO, Gene Bullis, will speak to the quarterly numbers; but first, I would like to elaborate on our 2004 highlights and our initiatives. In large part due to the accomplishments delivered in 2004, Conseco is vastly improved today from when we started 2004. We have successfully faced many financial and operational challenges, enabling us to make impressive strides to position Conseco with a strong foundation and sustainable forward momentum. From a financial perspective, the financial transformation, which we completed during 2004, dramatically improved our debt-to-cap ratio from 32 percent down to 18 percent. Our debt service costs will be considerably reduced in 2005 by almost $100 million per year from $154 million to $55 million, contributing to our strong cash flows.

The financial strength ratings of our insurance subsidiaries enjoyed important upgrades from the major rating agencies, including AM Best, S&P, Moody's, and Fitch; and we are well-positioned to earn additional upgrades with operations, sustainable profitability, sales, capital structure, and financial strength, which compare favorably to A-rated companies. In each of the last 5 quarters, we have delivered solid profits from operations, demonstrating Conseco's ability to produce strong, sustainable earnings. Our cash flow from operations and successful recapitalization have brought Conseco up to an impressive combined RBC at December 31, 2004, of 318 percent, a 93-point improvement over the RBC prior to our emergence.

In addition, we were able to reach an important closing agreement with the IRS, which determined that the worthlessness of Conseco finance was a $6.7 billion ordinary tax loss, which exceeded our conservative estimate of $5.4 billion. As a result of the closing agreement, and our track record of consistent earnings, we were able to reduce our tax valuation allowance by nearly $1 billion; and in accordance with GAAP, correspondingly eliminate all of the goodwill and Other Intangible Assets line item on our balance sheet and increase our additional paid in capital. Year-end 2004 book value per share on a GAAP basis increased smartly to $19.18, up from $17.09 at the end of 2003. Finally, achieving S-Ox 404 compliance clearly demonstrated Conseco's resolve to embrace compliance and to maintain strong internal controls. As discussed on our last earnings call, S-Ox 404 compliance was more challenging for Conseco than other companies, due in large part to our legacy of prior acquisitions, which had not been integrated. And as with many other challenges, the Conseco team performed better than expected.

Now let me take a moment to discuss our progress on our major initiatives. On our last earnings call, we talked about the major initiatives that, in the short-term, are fundamental to achieving our A-rating. And in the long-term, will enable to us fulfill our vision to make Conseco a premier insurance company, serving middle America with life and supplemental health insurance products. We have been very focused on delivering continued progress on each of these initiatives and we are a much improved company today because of that focus.

Our first initiative is measured sales and revenue growth. We are building distribution in products where we can compete profitably today, and which will serve as the foundation for a family of products in distribution, upon which we can continue to build after we achieve an A-rating. Our Banker's Life business had a record sales year, achieving an 8 percent overall sales increase versus 2003, thanks to the drive of our dedicated 158 branch managers and their talented sales agents in the Banker's organization and the Colonial Penn direct distribution business. I am extremely pleased with Banker's and Colonial Penn's results, and I am very encouraged by the positive trends we are seeing in sales, productivity at new branches and agent recruitment. Sales at Conseco Insurance Group for 2004 reflected the challenges of rebuilding independent distribution. To be blunt, Conseco Insurance's sales in 2004 were lower than planned, and we are taking deliberate steps to meet our sales challenge.

We have recruited new leadership, including Brad Corbin, our new EVP of Sales at Conseco insurance, who joined us last month. We've also stepped up the pace of our new products, and rolling them out successfully. Conseco Insurance introduced a new major cancer product in the last half of 2004, which has already been well-received by the market and 4 new products in the first quarter of 2005. And we have plans for yet 2 more product rollouts in the second quarter of 2005. In addition, we have stepped up the pace of agent recruitment, particularly in health and annuity lines that are expected to fuel Conseco Insurance Group's near-term sales growth. At Banker's, Colonial Penn and Conseco Insurance, our goal continues to be measured sales growth, across our product portfolio with special emphasis on our higher margin products.

Our second initiative is operational excellence. We are implementing a best-in-class operating platform designed to deliver excellent customer service in a scalable low-cost environment.

Our third initiative is technological excellence. We are consolidating and simplifying our data processing and management systems in order to provide fast, real-time access to our policyholders and distribution partners, reducing redundancy and thereby eliminating impediments to scale. At Conseco Insurance, we have reduced our administrative systems from 33 in April of 2003 to 23 currently; and we expect to convert or eliminate another 4 systems by early April. We continue to apply rigorous cost benefit analysis to all conversions to make sure they will improve service as well as reduce cost and accommodate scale.

Our fourth initiative is tight management of expense reductions and our in-force business. Until we earn higher ratings, our earnings growth will be supported by our ability to maximize the profitability of our in-force blocks and to rigorously manage our expenses. We are, therefore, aggressively eliminating nonstrategic costs, rationalizing organizational redundancies, streamlining back office operations, and improving claims management and adjudication processes, especially in our closed block long-term care business. We made substantial investments in talent, S-Ox compliance, systems simplification, new products and other business initiatives in 2004. Even so, we hit our goal for 2004 expense savings and through the tight management of expenses at all levels of our organization, we are highly confident that we will achieve or exceed or $30 million expense savings goal for 2005.

Our fifth initiative is best practices in governance and compliance. I want to say how proud I am of Conseco's Sarbanes-Oxley team, led by Dave Berra [ph], who heads our internal audit staff. The S-Ox team, and many others who supported the team, put forth an extraordinary effort in 2004 to guide this major project to a successful conclusion. Today, we are already hard at work to leverage our S-Ox activities to go beyond simple compliance and to push best practices throughout Conseco.

Our final initiative is to build a unified performance culture. We are upgrading management talent throughout the organization. The 15 senior operating officers added since August 2004 have, in the aggregate, nearly 300 years of relevant experience in financial services. Our success in recruiting strong new talent, I believe, reflects the fact that Conseco's transformation is clearly building impressive momentum. People see that Conseco today is a very different company from a year ago, and that we are determined and well-positioned to build a great company. Today's Conseco offers a special career opportunity, which attracts and retains the highest caliber of industry talent interested in contributing to something transformational.

In our last call in November, we talked about the key additions to our operations team at Banker's and Conseco Insurance. This team has already facilitated great progress in delivering operational excellence. Since then, we have recruited 3 more key additions, each with a strong track record, and each with the drive we need to accelerate our vision to become a premiere insurance company, serving middle America with life and supplemental health products.

First, Brad Corbin was named EVP of Sales for Conseco Insurance this February. Brad is responsible for driving sales growth through Conseco's independent distributors, and has a proven track record, specializing in developing profitable and lasting relationships with independent distribution partners. Second, Ross Bostic [ph], our new EVP and Chief Information Officer, started work just last week. Ross is a unique talent with the highest level of relevant IT expertise, and I'm delighted to have him as part of our all-star team. Ross joins us from JP Morgan Chase, where he was the chief technology officer of the Chase Insurance Group. He will be instrumental in our effort to develop and deploy information technology as a competitive advantage to improve customer service while reducing complexity and cost.

Third, Jim Hohmann was named EVP and Chief Administrative Officer in December with responsibility for Conseco's legal, actuarial, new product development, strategic planning and business development functions. Jim is a gifted and first-class talent who enjoys extensive industry experience with a strong track record of success. Jim hit the ground running as an important member of our team and is already playing a big role in developing and implementing our mission to transform the Company into an industry leader. I have asked Jim to give you a few comments this morning on the subject of why Jim decided Conseco today offers a special and compelling career opportunity and what he's seen at Conseco in the 3 months he's been with us. Jim?

Thank you, Bill. And good morning, everyone.

As Bill stated, he asked me to share a few thoughts with you, based upon my experience in the industry and my perspective as a relatively new member of the Conseco management team. Starting with my background, I have spent my entire career, the past 27 years, in the insurance industry. I am a fellow of the Society of Actuaries, and a member of the American Academy of Actuaries. After a few years working as an actuarial student in stock life companies, I began a 14-year run in management consulting, first with Peat Marwick, and then with Tillinghast Towers Perrin. When I left Tillinghast in 1995, I was the managing principal of the life office in Chicago. From there, I joined Zurich Insurance in 1995 as part of the newly-assembled senior management team for their Kemper Life acquisition. Ultimately, I became president of the financial institutions business, which included all retail products distributed through financial institutions, broadly defined as banks, broker/dealers and financial planners, and also included all business where a financial institution was the end customer. This business grew rapidly and profitably.

In 2001, I was recruited to XL Capital, which was looking for a leader to start up a U.S.-based life insurance business. As president and CEO of the business, I was accountable for developing a strategic plan, establishing the legal entities and platforms, recruiting, and building this new business. In the subsequent 3.5 years, we developed a very substantial life balance sheet.

In late 2004, I was approached by Conseco. I spent considerable time with Bill and others discussing Conseco, its current position in the market, its strengths, opportunities, and challenges. As I shared at a recent strategic gathering of associates at Conseco, I joined Conseco upon concluding that Conseco offers the opportunity to really do something special. I based that conclusion in part on pure strategic and financial analysis of Conseco that tells me we have strength and strategic focus in a variety of customer needs-driven markets that are bolstered by favorable demographics; but more importantly, I based that conclusion on the team that has been and continues to be assembled. During my interview process, the excitement and passion for success was clearly tangible. Since I have joined Conseco, I continue to experience that level of excitement and commitment and, of course, am now a part of it. In summary, I'm excited to be here and to have the opportunity to play a key role in creating a very special company at Conseco.

Now I'd like to turn it over to Gene Bullis, our CFO. Gene?

Thanks, Jim. Good morning, everyone.

I have some comments on the quarter's financial results as detailed in this morning's press release. Net income for the fourth quarter was $76.9 million or $0.46 per diluted common share. This included net realized investment gains for the quarter of $7.3 million or $0.04 a share. Our book value per share at December 31 was 19.18, excluding other comprehensive income under FAS 115. As noted in the release, we reduced the valuation allowance of our net deferred tax assets by $947 million at December 31. This adjustment had the affect of eliminating all of the goodwill and other intangibles on the balance sheet and added approximately $62 million or $0.41 per share to our book value. Our consolidated statutory results for 2004 were solidly within our targets. The cash flow capacity of our insurance subsidiaries include statutory net operating income before realized gains plus interest and fees paid to the nonlife companies. Such cash flow capacity totaled 295 million for 2004, which was at the upper end of our targeted range of 250 to 300 million. Our consolidated risk-based capital ratio was 318 at December 31.

With respect to guidance for 2005, as we stated in this morning's release, our priority in 2005 will be to maximize long-term value rather than short-term results and to make substantial improvements in future growth opportunities. Nevertheless, we remain confident that our earnings for 2005 will at least meet the lower end of the current 2005 analyst estimates published by First Call of $1.68 of net income per share, based on our year-end diluted shares outstanding of a dollar -- of 187 million shares and again, that -- that per share number would exclude any realized gains and losses. As we've commented both in the release and in Bill's comments earlier, our earnings growth over the next year will come primarily from improvements in the insurance margins in the runoff segment and other tight management of our in-force as well as expense reductions. We've also managed to increase portfolio yields during '04, despite the low interest rate environment that we experienced. So, we think modest improvements in investment income are reasonable to expect.

Relative to quarterly results, as we've said, our -- as I think everyone has come to realize, our business isn't linear from a quarterly basis and our results are subject to some level of variability. And that's why we give annual guidance and not quarterly guidance. For example, we do typically see higher mortality in the first 3 months of the year, which is true to some extent as we've seen early in the quarter for the first 2 months of 2005. Also, a portion of our earnings growth that will come from expense reductions will occur during the year and not all up front so that there should be some improvement in the parent of earnings as a result of cost reduction.

Our businesses are continuing to generate good cash flow capacity, which significantly exceeds our debt service. As most of you are aware, our current bank debt agreement is relatively restrictive. As we approach the noncall period in June of this year, we will evaluate opportunities to amend this agreement or refinance it to improve flexibility and costs.

With that, I'll turn it back to Bill Kirsch for some additional comments.

Thank you, Gene. I am especially appreciative of the intense effort and good team work by each of our dedicated associates and distribution partners who contributed to make 2004 a pivotal year for Conseco. Together, we have made today's Conseco a very different company from a year ago. And we are the heart of the team that will take Conseco to the next level in 2005. As we stated on our last call, our mission is to continue to take the tough action and to make the investments necessary to earn A-category ratings as soon as practical, in a manner which positions our ability to grow shareholder value over the long-term. In our release today, and in this call, I trust that you can sense our momentum. Our board, led by our Chairman, Glenn Hilliard, our executive leadership, and our employees are fully aligned, top to bottom, in our determination to make Conseco a valuable and rewarding long-term opportunity for our customers and shareholders. We believe in our products and the attractive value we offer our customers. We are dedicated to supporting our customers, to making it a positive experience every time a customer interacts with Conseco, and on being there when they need us. And now, we will open it up for your questions. Operator?

[Operator Instructions]. Vanessa Wilson, Deutsche Bank.

Thank you. Good morning. Could you talk a little bit about any metrics that the rating agencies had given you, or hurdles that we should track as you report quarterly earnings to see that you're making progress towards what they want you to do for your -- for your upgrade in rating?

Well, I'll start and then Gene will join in. Interestingly, there are broad themes that they want to look at in evaluating our performance. There have been no specific metrics. Financial strengths is certainly one key metric, but it is not the only metric. Interestingly, our performance during 2004 has given us the ability to build RBC very nicely throughout the year; and wrapped into the ability to build RBC is a lot of important ingredients that they are looking at.

Sustainable earnings, tight management of expenses, measured sales growth, and importantly, sustainability of our profits and cash flows. They have also talked about making sure that we have continuously improving operations and I believe we are making exceedingly good progress on each of the areas that they are looking for us to demonstrate A-quality results. There are no specific metrics; and in particular, our analyst at AM Best was very careful to point out to us that they do not take into account whether we make or miss quarterly earnings by a penny or so. They're more interested in broad and meaningful trends in our business; and they understand that any complex financial organization will have some degree of variability from quarter-to-quarter; and that, in reality, most businesses, like ours, do not, with natural results, wind up on the penny from quarter-to-quarter.

So, given, I guess, that they're probably more focused on your cash flow, could you talk through -- you have this concept of cash flow capacity. Could you talk through both actual cash flow and cash flow capacity in '04? And how that might change in '05?

Well, I'd be happy to do that, but I would back up a little bit. I don't think that the rating agencies, particularly AM Best, are particularly focused on changes or looking for a change in our profile, relative to what we're currently generating in terms of cash flow. I think the rating agency analysts tend to behave similar to most analysts, and that is they ask us what metrics we're using to measure our business and they identify where they think those metrics -- where we have targeted those metrics to show improvement, and then we report back how we've done. So, the metrics, I think, that we're using are simply the ones that we are already measuring in terms of -- of showing improvements in the business.

And the area is -- is not so much financial strength or capital adequacy, because I think rating agencies would agree that we've -- we've achieved significant stability in that arena, but it's more in terms of sustained operating performance, relative to premium sales growth and competitive position in the market. Those are more subjective and more difficult to put metrics around.

And, in particular, they are evaluating the sustainability of our long-term performance, which I believe we have nicely demonstrated in each of the 5 quarters since emergence.

So, could you walk through the cash flow capacity? And actual cash flow as a separate question?

Well, from an insurance company point of view, the fact that we now have RBC up to 318 we're proud of, but we would expect to continue to at least maintain and modestly build RBC over time, particularly until we receive an increase in our financial strength ratings. So, the capital capacity that we have we would continue to maintain relatively strong within our insurance companies. Having said that, we have certain requirements relative to our debt arrangements that require us to maintain coverage ratios and those coverage ratios require to us move cash out of our insurance operations, in excess of our debt service.

So, we are accumulating some level in order to meet a coverage ratio test that's implicit in the loan agreement. So -- and those coverage ratios can be around 2 times our debt service -- or 2 to 3 times, minimum of 2 and up to 3. So, as we move more capital out of the insurance companies to meet coverage test ratios, we generate some level of excess capacity; and in the short-term, we use that to pay down debt, in order -- because that's the most efficient use relative to our existing debt costs. Is that responsive?

I'll call Tammy after the call. Thank you.

Jukka Lipponen, KBW.

Good morning. Bill, in terms of the management hires that you've -- you've made since you took over as CEO, can you give us a little color, how you think about when you're hiring people and how do you measure them to be the kinds of people you're looking to hire at Conseco?

Sure. Obviously we take a qualitative perspective on our new management hires and we are looking for people -- each of our hires have been basically specifically targeted to address our quest to transform the business. And if you take a step back and take a look at the highlights that I have delineated at the beginning of the call, you will notice that our ability to deliver on each of those highlights required strong management skills and personnel on a variety of fronts. So, we have gone out and done what we need to do to strengthen our talent in operations, in systems, in product development, in sales and we continue to look for additional upgrades on an as-needed basis.

Every time we assess whether someone should become a member of our team, we are looking for people who not only have a proven track record for success, but have the determination and entrepreneurial skill to fit into our team as a builder of a great business, as opposed to a manager of managers. Or simply a manager of managers. Obviously, both skills are very important; and we look for the full package of someone who is not only a good manager of managers, but also entrepreneurial in their spirit to build something. Those are the people that are attracted to our opportunity and we all are enjoying working together and it's coming together extremely well.

My other question is can you give us a little additional color in terms of where are you in the scheme of things in ramping up the Banker's Life new offices that you've opened? And what are the plans for '05? And also, the progress on building independent agent distribution on the other side of the house?

Well, let me first ask Scott Perry, our COO of Banker's Life, to answer that question, at least the first part.

Yes, thank you. On the new offices, our sales continue to be strong. The new managers, the structure we put in place to find the right ones, on-board them, get them trained, resulted in that group of managers exceeding the plan and our expectations for them in 2004 and their performance continues to be strong. Sales are currently running about 10 percent ahead of our original expectations for those new offices.

And I would ask Brad Corbin to answer the second half of your question.

Hi, thanks, Bill. Yes, I would like to just add on to a comment that Jim Hohmann made earlier, too. And that is that one of the things that attracted me to joining Conseco was the high level of excitement that I saw amongst people and the ability -- I'm moving closer to the speaker phone here, and just the ability to do something very special. This company is very well positioned to grow distribution. We have a very compelling value proposition that we're working on adding. There is an abundant opportunity out there with independent agents right now that are kind of looking for a home.

They're looking for a company that wants them, loves them, wants to grow a future with them. That's been caused by a lot of the consolidation in the industry. There are a lot of displaced independent distributors. So, we're working diligently here to leverage our relationships we have with existing people, as well as bringing new folks on board, and building just a quality proposition for them to partner with us and help us reach those levels of sales.

Thank you, Brad.

Thank you.

Mark Finkelstein, Cochran Caronia.

Hi, good morning. I've got a -- I've got a few things here. The Med sup loss ratios continue to trend modestly higher in the fourth quarter, whereas typically due to seasonality, you would expect them to trend down as the deductibles are filled, et cetera. I'm just curious what you saw or what the continuation of a trend that you saw regarding frequency or severity in the quarter was?

Well, a couple of comments. First of all, we do normalize for -- for benefit ratios as we make accruals in our -- our benefit reserves for -- so that the impact of normalizing for deductibles is spread during the year. So I wouldn't expect to see that. The Med sup ratio in CIG, as we indicated in the conference -- in the press release, did absorb a -- a persistency impact in the quarter.

So, it's more premium-related than it is benefit cost-related, and we would expect that we would be -- so I would normalize that out as I was predicting benefit ratios moving forward. The Banker's benefit ratio is trending up, that's an impact of a shift towards more group business and I would expect that the trend for the year would be consistent with -- with what we would expect looking forward.

Okay. Second question. You repriced the CIG Med sup book commencing 1-1. I'm just curious if you are able to just talk about trends and whether that you've seen any kind of initial positive signs of improved sales in the independent channels over the first 10 weeks or so.

Well, not only did we -- we reprice the Med sup book pretty much annually, but we also came out with a new product in Q1 of '05, that has a number of other features, including pricing. It's a -- it's a 3-tier product that involves some additional levels of underwriting that we think will improve our profit experience. It's too early to tell. It's a brand-new product. We are very encouraged by the impact that that product is having on our ability to accrue distribution, and we think that our -- so we're quite optimistic about the outlook, but it's very early in the rollout process.

Okay.

And I would like to ask Ron Bedendis [ph], who really is our Vice President in charge of Health Sales, to speak to that briefly.

Great. Thank you. As far as what Gene had indicated, it is definitely on track from the recruiting side.

We've noticed that this new product, with some of our new underwriting features that we are offering, has really been not only refreshing, but exciting to existing distribution as well as the new distribution that we've been able to recruit here over the past 10, 11 weeks or so. So, the momentum in the first half is definitely meeting our expectations as it relates to the new recruiting. And also, those are nicely turning into new submitted applications. So, we're very positive with the addition of the new product.

Okay. Great. And then just final question, a number of companies are looking at insuring Medicare's prescription drug plan going into '06 and I believe applications are due over the next couple of months. I'm just curious how or whether you plan to participate in this? And what your current thinking is?

I would invite Scott Perry, our COO at Banker's, to answer that question.

Well, clearly when we look at the MMA legislation, we plan to do everything we need to do to be in full -- full compliance. As far as being a PDP provider, we currently do not have plans to do that, although we are looking to -- and discussing actively with potential partners that could provide that benefit, that we can make available to our policyholders.

Okay. Great. Thank you.

Joan Zief, Goldman Sachs.

This is actually Andrew Broan [ph] from Goldman Sachs. We just had 2 quick questions. The first was, 3Q you said you were comfortable with -- or content that the 171 should fall within the range for '05. Then you remarked that 160 -- [inaudible] -- meet that number. Does 171 still fall within your guidance for 2005? That's my first question. And my second question is what interest rate assumptions are you assuming for 2005 if you have it, both the long rates and short rates?

Okay. We had a hard time hearing you, but we'll try and answer -- I would like to --

Sorry.

-- answer the first part, simply by saying the statement on our outlook in our earnings release speaks for itself and we are not in a position to expand on that any further. And second, I'd ask for Gene Bullis and then Eric Johnson to talk about the interest rate assumptions.

I wasn't quite sure I heard the question. Does it relate to what we're expecting in terms of new money rates for '05?

Right, right, just what are you assuming in your guidance? I know you just said that you are comfortable with 168 being at the low end. And just what are you thinking of as far as rates -- as far as 10-year -- as far as short rates?

Well, this is Eric Johnson. When we completed the business plan during the fourth quarter of last year, we faced a market environment, which we felt might be best viewed from a conservative perspective or perhaps a defensive perspective. We are planning cycle incorporated very modest increases and aggregate levels of interest rates and very modest expansion of spreads. In terms of market environment year-to-date, it's well within the -- the -- the perspectives that we expected within that planning horizon and, in fact, might provide a little potential incremental upside to plan if the market continues to play out as it seems to be wanting to play out through the rest of the year.

Eric, can you give us a little sensitivity in terms of what interest rate movements means to our investment profits --?

Yes, sure. Very difficult question. Multivariate in the extreme, but obviously there are 3 factors there, looking at today's market.

One, obviously increases in aggregate rates in terms of new money rates fall to the bottom rungs [ph] of higher GAAP yields in the portfolio, as -- as rates increase and the curve hopefully steepens a bit. That might create a -- a natural lengthening opportunity which will -- would in fact, fit pretty well with our insurance product funding needs, as well. And in that kind of market environment, risk might begin to be rewarded again, as it's probably not in today's environment. The first two of those factors together might -- you might view in general terms as being worth about 0.5 million to $1 million per year, per basis point, as a rough rule of thumb guidance.

And the third is almost -- is indeterminate. But as a rough rule of thumb, what I kind of use on the back of my envelope, is that if rates go up maybe 50 basis points in aggregate, that might be worth, all other things being equal, 30, $40 million to us, in terms of investment income.

Does that answer your question?

Yes, it does.

Thank you.

Thank you, Eric.

You're welcome.

Ken Zerbe, Morgan Stanley.

Morning. I was hoping you could give us an update on the next steps for the deferred tax asset? Specifically, when you do you expect to hear from the IRS? And has anything changed for your thinking regarding timing or the amount of another potential writeback? And I have some follow-ups.

As has been the case, this whole process continues to move at the pace of the government. So, it's difficult for to us be real clear about when resolution will -- will evolve, although we think it's sort of in a 9- to 12- to 15-month timeframe that we would have better visibility, rather than years. We would expect to review our deferred tax asset. We're required by GAAP to review it quarterly, but I think it would be unlikely that we would make any reassessment until year-end. And unless something really significant occurred between -- between now and our next year-end results. But I would be very surprised if we made any reassessment before first quarter of '06, based '05 year-end numbers.

Okay. Great. And then the second question is just back to the rating agencies, I understand that we're looking at the broad trends in your business. Do you have any sense in terms of timing, like when -- when do you expect to get an upgrade, based on your conversations with them?

That's a very good question. I would answer it as follows -- we do not want to be presumptuous to predict how rating agencies will move. All we can do is control our ability to continue to compare favorably to other A-rated companies; and we, I believe, have done a nice job during 2004 of implementing another -- a number of initiatives very successfully, to demonstrate value in our organization and franchise and sustainability of operations and profitability and growth.

I think we have demonstrated that we are able to execute successfully on several different initiatives simultaneously. In terms of next step with rating agencies, we're fortunate to have AM Best coming to visit our campus in Carmel next week, March 22, for our annual review and our expectations are to have a good meeting with them. I cannot predict, nor do I want to get in front of what they will do and how they will act. It is purely their judgment and we respect them.

Okay, great. And just a final question. In terms of your new product introductions at CIG, which products do you have the most confidence in? Or at least the greatest expectations for? I mean, it's a new Med sup product, an LTC product, what could provide the greatest upside to sales?

Well, I would say two things. Number one, at Banker's, we are accelerating the pace and sales of our life products. We are successfully selling through the challenge of the price increase in our new long-term care product, which is the result of a very carefully thought-through business plan and strategy and coordinated effort with the field, to position them to be successful, with the new -- the new price on our policy. And, in fact, we're seeing very good results to date, far more successful than some of our competition has fared. With respect to Conseco Insurance, we've talked about the new cancer product that we successfully launched at the end of 2004 and that is being very well received in the market.

We've talked about our new Med sup product with our smartly-engineered preferred 3-tiered underwriting process designed to attract better, healthier underwriting risks, which hopefully, will be aligning our interest better with customers. And finally, and most importantly, we are spending significant time currently working with important distribution partners to design specialty tailored products for them to sell; and that's going to take a good amount of our energy and focus during 2005, and Jim Hohmann, who is a -- I don't want to overstate this, but in my mind, a product genius, will be working carefully with our distribution partners to design value-added products that will be fundamental to our growth prospects in 2005 and beyond. Understand that it takes time to build relationships, design these products, but we are laying the foundation for that as we speak.

All right. Great. Thank you very much.

Fred Limb [ph], Partrarian [ph] Capital.

Good morning! Congratulations on a solid quarter!

Thank you.

Most of my questions were answered. I just have one left. When is the next time -- I mean, could you elaborate on the next -- on the net realized investment gains of 13.1 in Q4?

I would say that there's not too much to elaborate on. That's a reasonably modest gain. We're quite pleased that we're generating moderate gains, rather than generating default losses, because that's what that would represent. So, we're looking forward, we try to manage the portfolio very tightly with respect to gains and losses, we're not looking for significant trading activity to influence our results. We're more focused on the much larger impact of yield and gains occur as we position the portfolio in ways that -- that create yield opportunity.

Was that from the AT&T Wireless shares?

No. The period -- I believe that supposition had been liquidated in full --

In '03.

In '03. But those gains were -- we don't manage the portfolio around a bogey of gains or losses, per se. And we don't begin any -- haven't begun any accounting period with an objective generating gains or losses, per se.

Those gains were perhaps what you might call the favorable residue of -- of portfolio positioning activities, oriented around -- over the quarter a slight uptrade in terms of quality, a slight uptrade in terms of getting a little larger in -- in callable agencies, and a little smaller in some higher convexity products. And in essence, where just the gain loss related to a longer term strategy, but not in and of itself a -- there was no trading activity within the quarter or any gains taken that created that number in and of itself.

Okay. Thank you.

You're welcome.

Eugene Chen, SuttonBrook.

Thanks. I just want to go back to the answer on the deferred tax assets. Right now I guess there's a remaining $1.6 billion, which is roughly almost like $8.50 of book value. What exactly -- I think Gene mentioned that -- not to expect any change in that until the end of the year, but is the factors that would change that to -- to take away the valuation allowance, would that be linked to the IRS ruling? Or is it more a function of, again, showing more earnings generation power and then sort of taking that and then taking the valuation allowance downwards?

No, I would -- first of all suggest that you -- when you get the K on Wednesday, take a close look at it because I think we're providing a lot of detail on. what the valuation allowance represents. What's left is a significant amount related to capital loss carry forwards, which are very difficult for us to predict gains and so that would certainly not be likely to a valuation allowance adjustment, one way or another. Another portion of it relates to timing differences related to collectibility of DNO loans. So, that's really a -- a -- driven by that sort of side -- sideshow activity rather than directly related to anything that would -- relative to our earnings results. And the rest is related to some additional valuation allowances on NOLs that would be more available to revaluation as the tax position evolved.

But that -- it would be directly correlated to whatever position the IRS came out with, as opposed to simply just being conservative on recognizing that, given our earnings track coming out of bankruptcy?

It's really not a function of -- of -- of our earnings track coming out of bankruptcy. It's more a question of the specifics around the individual items of the valuation allowance and applying separate judgments on each of those.

Thanks.

Gentlemen, at this time, I show no further questions.

Good. I'd like to thank everyone for taking their time to join us today. We've enjoyed the opportunity to share with you the results of our fourth quarter and our year 2004, and I want to thank everyone for their continuing interest in Conseco and wish everyone a very good week.

Thanks, everybody.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.