CNO Financial Group Inc (CNO) 2005 Q1 法說會逐字稿

Thank you for holding and welcome to the Conseco teleconference. We will begin with an address from 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 zero, and an operator will assist you. As a reminder, this conference is being recorded.

Thank you for your attention and here is Tammy Hill.

Thank you. Good morning, everyone. Thanks for joining us for Conseco's first quarter 2005 conference call.

Before I 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 first 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 on Monday morning, may 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 the forward-looking statement. Please refer to this morning's earnings release and to our latest forms 10-k and 10-q for additional information concerning the forward-looking statements and related factors.

With us here on the call this morning are our CEO, Bill Kirsch; our CFO, Gene Bullis; and our Chief Operating Officer, Jim Hohmann. Also on the call today are Scott Perry, the Chief Operating Officer at Bankers Life; Steve Stecher, the Chief Operating Officer at our CIG segment; Russ Bostick, our Chief IT Officer; Ron Ruhl, one of our chief actuaries; and Eric Johnson, the Chief Investment Officer and President of 40/86, our investment advisor.

Bill?

Thank you very much, Tammy. I am very pleased to report our sixth straight quarter of strong earnings, with net operating income up 89% over the first quarter of 2004 and net income applicable to common stock, up 45%. EBIT, which factors out the impact of dilution and reduced interest charges from our 2004 recapitalization, rose 13% in this quarter compared to the first quarter of 2004.

We are continuing to build an impressive level of financial strength, ending this quarter with book value per share of $19.67, up from $17.86 in the first quarter of '04. We have zero goodwill, a substantial N.O.L., low leverage, a debt-to-capital ratio of about 17% at the end of this quarter compared to 32% at the end of March 31, 2004, and a high-quality investment portfolio with 96% of our fixed-income investments rated investment grade.

Our CFO, Gene Bullis will detail in a few minutes our strong first-quarter performance, reflecting the benefits of our transformational accomplishments during the last 12 months and our success in executing our six key initiatives in 2005. Without stealing Gene's thunder, I will cover selected financial information and then cover highlights of our first quarter.

Our 72 million of net income compares quite favorably to the 49.9 million in the year-ago period. However, Q1 '04's 49.9 million includes 12.8 million of realized investment gains compared to 2 million of realized investment gains this quarter. Backing out realized investment gains, period over period, core net operating income for the first quarter of this year was a record $70.3 million, 89% ahead of the 37.1 of net operating income in Q1 '04.

Our strong financial performance is especially gratifying to our team in light of the many projects we are implementing to drive long-term growth in sales and earnings. I sincerely appreciate the continuing extra effort and focussed teamwork by all of our dedicated associates and distribution partners who have come together in our determination to drive Conseco's strong performance.

Now let me take a moment to discuss our progress in our key initiatives. Our key initiatives continue to provide us with the focus and discipline to improve productivity across all of our businesses. In the short term, they will enable us to merit A-category financial strength ratings. And in the long term, they are designed to build long-term value for our shareholders, policyholders, and distribution partners as a premier insurance company serving middle America in Life, Annuities and Supplemental Health products.

Our first initiative is measured sales and revenue growth. Until we earn higher ratings, our strategy is to deliver measured sales growth in products where we can compete profitably with today's ratings.

Bankers Life achieved another record sales quarter. I'm very proud of Banker's 4200 agents and the impressive job they did setting yet another sales record in this quarter. Bankers' growth is being fueled in large part by increased agent recruitment and retention; success in rolling out three new higher margin products, including increased premium LTC; reduced guaranteed rate fixed income annuity; and increased premium -- I'm sorry, a brand new single-premium Whole Life policy. Strong results from our distribution growth strategy with net production at Bankers branches running more than 20% ahead of plan.

And finally, from the full alignment of the field and home office. Our re-engineered operations at Bankers is better equipped to support the success of our branch managers and agents and the Bankers family is responding well to Conseco's investment and Bankers' long-term success in the alignment of our goals and rewards.

At Conseco Insurance Group, we are making good progress in building a profitable independent distribution channel. We are not willing to buy sales. Instead, we are taking a more fundamental approach centered on re-engineered operations designed to enhance efficiency, customer service, and agent care, rolling out attractive new products. We've launched five new products so far this year, which include a new Medicare supplement product, a new bonus equity indexed annuity, the Conseco 7, a competitive new work site, universal life product, a new fixed universal life product called Asset Builder, and a new equity index universal life product, Asset Builder Plus.

We are also building valuable relations with national IMOs and adding more feet on the street. Our sales at CIG during the first quarter are in the aggregate in line with our expectations.

Our second initiative is operational excellence. We are making substantial progress implementing a best in class operating platform designed to provide excellent customer service in a scalable, low-cost environment. We have re-engineered business processes for claims, policyholder services, and agent care, and we have improved our processing procedures to more effectively adjudicate claims. Our success in operations is being driven by our new operations leaders who are working closely together across all business units to identify opportunities to eliminate redundancies and build efficiencies.

We are on track on all major projects and many are ahead of schedule. A good example of our progress in Operations is average speed to engage customers in our call center has been reduced from 2 minutes at the start of this year to 15 seconds today.

Our third initiative is technological excellence. We are consolidating and simplifying our data processing and management systems in order to provide better and more cost-effective service. We have created one IT organization to provide shared services across the organization. Since April 2003, we have eliminated 14 older CIG policy administration systems, and we are continuing to cost-justify the additional conversions remaining on the calendar for 2005. So far this year, we have converted four systems quite successfully.

Our fourth initiative is expense reductions. We are determined to become a low-cost provider. Both Bankers Life and Conseco Insurance Group achieved or exceeded their expense savings goals for this quarter. We are continuing to make significant progress in reducing nonstrategic expenses and eliminating organizational redundancies. We remain confidant that we will achieve or exceed our previously stated 2005 expense reduction goal of $30 million year-over-year, and that is net of new investments. And we are busy developing our plan for further expense reductions in 2006.

Our fifth initiative is Best Practices in governance and compliance. Our work to achieve compliance with section 404 of Sarbanes-Oxley has enabled us to improve the effectiveness of our internal controls and begin building a framework of best practices and compliance in controls throughout our organization, which will position us extremely well in today's world of enhanced regulatory scrutiny in the insurance market.

Our sixth initiative is to build a unified performance culture. Since the beginning of the year, we've implemented a 2005 paid for performance bonus plan tied to the execution of our key initiatives. We've cemented alignment among the enterprise-wide management team and we have implemented a rigorous talent review process that includes every full-time employee in our Company, focusing on their individual talents and their contributions to our overall success. This will become a permanent part of our culture and will drive enhanced productivity across all of the Company.

In summary, Conseco has a straightforward plan to enhance productivity and it is building momentum because we've been able to align the efforts of our team members at all levels and in all locations to support our plan. I believe that our hard work is paying off, and it is not only driving earnings growth but it's also improving the quality of our earnings.

And now, I will turn it over to our Chief Financial Officer, Gene Bullis, to discuss our financial results. Gene?

Thank you, Bill. As detailed in this morning's release and as Bill commented, net income for the first quarter was 72.3 million or $0.44 per diluted common share. Excluding realized investment gains, net income was 70.3 million or $0.43 a share. We focus internally on EBIT in measuring operating performance of our segments, and we're pleased with the 13% increase in EBIT, period over period.

Our book value per share at December 31 increased to $19.67 a share, which excludes other comprehensive income under FAS 115.

Overall, we were pleased with the results for the quarter. Net investment income showed improvements in all three of our operating segments as a result of increases in market rates of interest, duration matching within our product lines, and management of prepayment risk. Operating expenses were generally consistent with our plans and as Bill said, we continue to be confident that we'll have expense savings of at least 30 million in 2005 compared to 2004.

We did see increases in some of the loss ratios of our supplemental health lines, specifically MedSup at Bankers, and Specified Disease at CIG. We view the increase in Specified Disease loss ratios as isolated and not a trend. Bankers' MedSup loss ratios will ultimately trend towards statutory minimums and will likely settle in around 70%.

Our statutory financial statements for the quarter will be filed on May 15 and we expect stat results to continue their solid trends and be consistent with our expectations. We also expect that estimated RBC levels at March 31, after completion of the statutory filings, will continue to be well above our target of 300% or better.

Our businesses are continuing to generate cash flow well in excess of our debt service requirements. As we mentioned in our fourth quarter conference call, we will likely evaluate opportunities to refinance our current bank debt after [inaudible] call protection lapses in late June.

Obviously any changes we make to our Capitol structure will be dependent on the capital markets at the time. However, it's fair to say that we feel we have made some significant progress on a lot of fronts since the agreement was struck last summer. We are a much improved credit than the markets perceived us to be a year ago. We would expect our refinancing to have a modest positive impact on our future interest costs, but expect some charge consistent with the refinancing related to the unamortized debt issuance cost associated with our current agreement. The real benefits would be expected over the longer term and would include increased operating flexibility as well as lower costs.

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

Thank you, Gene. Thanks to our consistent progress on each of our major initiatives, Conseco today is vastly improved from the first quarter of 2004. Our record net operating income in the first quarter of 2005 and our strong financial position at the end of this quarter are manifestations of the solid foundation we have built at Conseco.

We have created momentum faster than expected by building on our strengths and being disciplined and resolute as a team to take the tough actions necessary to increase productivity and drive increases in sales and earnings. We are committed to institutionalizing operational excellence and the discipline of rigorous expense management across our businesses.

As we stated on our last call, our mission is to continue working our plan to earn A-category ratings as soon as possible in a manner which position our ability to grow shareholder value and drive earnings over the long term. And now we will open it up for your questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question comes from Jukka Lipponen of KBW. Your question, please.

Good morning. First of all, on the rating, can you give us any color or any update from your meetings with AM Best?

Yes. I'd be happy to. We had a very productive meeting with AM Best. They came to join us at our Carmel campus. We spent a full day going through our overall strategy, our business plan, our execution of our business plan, across all segments of our business, and we enjoyed the meeting very much.

Consistent with our prior approach to commenting on rating, we are doing everything we think is appropriate to position ourselves to merit additional ratings upgrades as soon as practicable. We have a very smart and talented team implementing on our many initiatives to accomplish that. The rating agencies each have their own very talented and accomplished teams and we defer to their decisions on when they feel it appropriate to recognize our performance with additional rating upgrades.

Then in terms of sales and premiums, it looks like premiums, they had been up modestly on a sequential basis at Bankers and now it looks like first time turned up at CIG as well. Can you comment on how the persistency is developing?

Well, that is significantly different, line to line. I would say that we're quite up -- with respect to CIG, we're quite pleased with the persistency of our Life and Annuity lines. They're holding up quite well, particularly given the rating situation, actually, our persistency is exceeding our expectations. Persistency on Specified Disease is also quite consistent with our expectations and we don't see any concerns there. Persistency on MedSup has been higher -- or, lapses have been higher than our expectations on MedSup and at CIG and actually, that did have an effect on benefit ratios for the quarter.

It's actually kind of an anomaly that because of Fresh Start accounting on some of our MedSup blocks when we have higher persistency, it actually generates a small gain. But that's not good for the long-term level of premium and profitability of the business.

I guess I would only comment that our improvements in persistency are not by accident. We have a focussed team dedicated to conservation of in-force, and they are making very good progress in managing our blocks.

And lastly, on the loss ratios, it looks like -- I don't know if in the runoff business you had any reserve releases, and -- in terms of the Bankers Life -- excuse me, the CIG MedSup ratio being very low. And then, can you also comment on some of the other ones which seem to be trending up and should we expect that to continue or should they start to sort of level off or perhaps even come down?

With respect to the closed block, we did not have any reserve releases. That improvement, period over period, is essentially directly related to improvements in paid claim ratios. Relative to -- as I commented in my comments, the Specified Disease ratio we view as a one-off event, and that should normalize back to, you know, in the 70% range for CIG.

The low benefit ratio for MedSup at CIG is a phenomenon of higher lapses, and that should normalize into the mid 60s and the MedSup ratio for Bankers was a little high this quarter. We see that normalizing down into the 70% range.

Thank you.

Our next question comes from Mark Finkelstein of Cochran Caronia. Your question, please?

Hi, good morning. Just to go back to the MedSup loss ratio in the Bankers channel. I guess at 72%, and I believe that you guys actually normalized for the typical seasonality, which you particularly see in the first quarter. I guess, what is going to drive the loss ratio to trend down to 70%? Are you implementing in-force rate increases on the block?

Well, that is, in fact, how the product works. Rates are increased every year as the claim cost curve dictates so that yes, and does -- those rates generally take effect at the beginning of the year, but it does take a little bit of time as approvals trickle in. You'll see some improvement in pricing as the year progresses. So that should help normalize loss -- benefit ratios for MedSup on the Bankers line.

There is -- occasionally, there are either releases of redundancies or adjustments for deficiencies of prior period development. We did have a small deficiency affecting this quarter, $2 million. Actually, if you are comparing it against last year's first quarter, we had a small release of a redundancy of 2 or $3 million. So that affects any given quarter's benefit ratios. But again, over time, they should normalize out and expect a target toward 70%.

Okay. Then on the long-term care sales, I know you implemented sizable rate increases. The actual sales were a little stronger than what I would have expected. I guess looking at the nominal sales figure, does that incorporate or was that with the newly priced product or is that still kind of run-off from the older product?

Scott, can you please take that question?

I'd be happy to. Thanks, Bill.

You're correct, overall launch from secure sales at Bankers were up 13% for the quarter, period over period. The new product, however, represented only about 10% of that. However, the new product did represent about 20% of our submitted business during that period, and it takes four to six weeks for business to be processed. So we are pleased with the rollout and introduction of our new product, and it is gaining momentum and ramping up as would be expected, given the ramp up time that it takes to get products approved. The duplicity of having both products in the market by the mid to the end of the second quarter, we will be selling only the new product in approximately 46 states.

Okay. Thanks. Then just finally, on the refinancing, do you expect to refinance at similar aggregate debt levels or are you going to take that down a little bit?

Well, at the time of refinancing, we would probably be replacing the entire level of indebtedness, but we would have the ability to -- as we currently do -- have the ability to pay that down with existing available cash flow. So I wouldn't expect a significant difference in the level of the debt out of the box, but we would continue to evaluate the use of excess liquidity and pay down what we refinanced at the same rate that we would have expected to pay down what we currently hold.

Okay. Thank you.

Once again, ladies and gentlemen, if you have a question at this time, please press the one key on your Touch-Tone telephone. Our next question comes from Jeff Bronchick of RBC Investment Management. Your question, please.

It's been answered, thank you.

Once again, if you have a question, please press the one key on your Touch-Tone telephone. Our next question comes from Thomas Gallagher of Credit Suisse First Boston. Your question, please?

Good morning. First, Gene, just a question on the refinancing. Did you say that you are going to do the refinancing when you're legally allowed, I guess, which would be in June, or are you waiting for some adjustment in ratings before doing that?

No. We would expect to refinance as soon as we can. We believe that given our existing situation, we could achieve an improvement in pricing even at our current ratings and we think that it would be unwise to leave that on the table. We would expect to negotiate something that would enable us to move as ratings improve. So we're not going to wait.

Okay. And the charge that you commented on, is that going to be an operating income item or below the line in net?

Well, we'll identify how much it is, and I wish I could tell you because -- but frankly, I don't know. It depends on how much is simply a pricing amendment, which wouldn't affect any of our unamortized balance to the extent to which the same syndicate participates. So there are some particular accounting rules that will affect how much of the unamortized balance, which at the end of the quarter will probably be 7 or $8 million by the time we refinance. So we're going to have to figure out as we go whether or not that's going to flow through or stay on the balance sheet. When it does, we'll carve it out separately and report it as a component of cost.

Okay, got it. The -- I guess, couple of other questions. Just want to make sure that I understand this correctly. The very low loss ratio reported in MedSup and CIG, did that -- my understanding from looking through this, it looks like there where's a pickup in DAC amortization?

Yes, most of that gets offset by a writeoff of DAC -- or VOBA, actually.

Right, right. VOBA. So, was there a bottom line benefit or was the vast bulk of that offset by the VOBA amortization?

Bottom line benefit is a million dollars.

1 million? Okay. Okay. Also, just on the spec disease, what was it in particular that moved that up and why should we be comfortable that it's going to trend back down to 70? Was there some kind of reserve true-up? Was it not a paid claims issue? What exactly happened there.

Actually it's a number of smaller items, but the most significant being an increase in paid claims, which we've done a fair amount of digging on, and we found that a lot of it is attributable to the fact that we moved our claim operation from Chicago to Carmel and we sent out change of address notices to all our policyholders, and we had a small spike in very old claims. So, essentially, we woke up some people that had forgotten they had a policy and sent in, you know, we got some 2-year-old claims that worked their self through this quarter. We don't see any -- that's not a trend and that's not going to continue.

You have not seen that continue to trickle in in 2q?

That's right.

Okay. And would that be the biggest variance?

Yes.

Okay, got it.

That's at least -- that's two points on the benefit ratio.

Got it. Okay.

Next is, in terms of the runoff block of -- in terms of what you're seeing there, I know you mentioned it was all a cash claim improvement and it was a big improvement. I'm just wondering whether or not you think that's sustainable, whether you continue to see that kind of at least stabilization to maybe moderate improvement? Because obviously, as we progress here, that keeps getting a little bit better, but that was a pretty big delta for the quarter.

Yes, certainly compared to the first quarter, but compare quarter to quarter, I think we're seeing continued stabilization and the benefits of all of the work that we've done in the claims adjudication arena, I wouldn't want to predict that that improvement will continue on that trend line. But I think that where we are is where we would expect to be, and further improvements will be as a result of further work that we do.

Okay. And last question, can you just address what I would view as maybe your biggest challenge, which is the Medicare supplement in CIG and how revenues have clearly been weakening and whether there's any hope that that turns around or flattens and kind of what you're seeing from a competitive standpoint there?

Sure. We think we have a month and a half under our belt in selling the new product. The rollout has gone reasonably well. We think that our rollout is putting us in a trajectory where we are actually going to see improvement over the fourth quarter and continue to see that improvement over the run rate from the old product. And there are --

And Bill, would that be from a sales standpoint? The improvement you're talking about?

Yes.

Okay, got it.

Yes, I'm only talking about sales.

Got it.

We continue to recruit new IMOs. We are adding feet on the street. We have a good plan to continue to roll out. We've only been approved in 25 states. One of our biggest states is Texas, and we haven't even been approved there yet. So that is about 15% of our plan. So there are a lot of good things going on that we feel are very positive in the MedSup rollout for 2005.

Okay. Got it. And then, just on the persistencies, are there any, I guess, initiatives underway to improve persistency there?

Yes. We are working in concert with our IMO partners to identify which agents are, if you will, rolling the business and we are addressing it as appropriate and making sure once we have the information we share the information with them, that the agents know that whatever consequences there are with any residual business that's on the books, will be addressed.

Okay. Thanks a lot.

Thank you.

Our next question comes from Joan Zief of Goldman Sachs. Your question, please?

Good morning.

Good morning.

I have just two things. First, just a follow-up on the new MedSup products. Is that new because it's a new pricing structure or is it a new -- just in general a new product design?

Both. It's a new pricing with a new product design with 3-tiered underwriting.

Okay. And is the prices -- does that make the prices -- I guess the question is, are you selling more of the lower priced product or are you selling -- the lower tiered priced product, or is it all across the board? Because I guess my question is, are you finding that MedSup is becoming an affordability issue?

Well, the reason we've gone to the 3-tiered product is to attract healthier lives at a better cost, and we are seeing the benefits of that and it ultimately will translate into a stronger, more profitable book.

Okay. Okay. And last -- the other thing I just wanted to go over is just the long-term care market. We hear a lot of people talking about disruption in that market in general, again, sort of affordability. And things like that. And so I guess, what are you doing that is different that allows you to grow the long-term care sales?

Well, we -- I'll give my quick overview and then Scott can elaborate on that further, if he would like.

But we feel at Bankers we are positioned at a target market in a focussed way that differentiates us from some of the larger competitors that are experiencing more challenges. They are selling to a more upscale market. We are focussed on middle-American seniors. As such, our prices and our sweet spot is in the more affordable range to begin with and we don't sell as many high premium features. Our profitability is not based on -- and our revenues are not based on selling these add-on features that really can drive revenues but have the interesting impact on books over time as being the place where most of the turmoil occurs and making sure the profitability matches to original actuarial designs.

So we're targeted at the middle of the market where there is not as much price resistance, and we think that not only puts us in the position to continue to sell in accordance with our plan and maintain measured sales growth in our long-term care products, but also puts us in a position where our book is more stable because we don't have the more expensive, exotic features.

Okay. One last thing. About your -- the potential debt refinancing. We should assume that if you do restructure that debt, the covenants about dividend payments and repurchases are going to be eliminated, right?

Well, we will seek to get more flexibility. Whether or not -- eliminated or create larger baskets, we're going to be looking for more flexibility in our debt structure.

It's too early to tell. To the extent that eliminating those covenants impacts pricing, we're going to have to make a cost benefit analysis.

Okay, thank you.

Thank you.

Your next question comes from Ed Chen of Ivory Capital. Your question, please?

Hey, guys. Just a couple topics. One is just a follow-up question about debt refinancing. Are you assuming any benefit from interest cost-savings in your guidance?

We had built our plan with some modest reduction in rate -- relative rate, so slight improvement, which we think we can meet or exceed as we refinance.

Okay. So that's built into the back half of the plan, effectively.

Yes.

Okay. And then, second question, regarding the Bankers Life earned premiums. Could you just walk me through or help me understand better a little bit of some of t he trends that are underlying both the first year premium collections as well as the renewals? I just wanted to understand some of the moving --

On Bankers Life, Ed?

Correct. Essentially, they were fairly solid and so the solid sales is kind of translating into fairly stable first-year, and as the old first year runs off it drops down into renewal, but of course on [inaudible] business, you are talking about the senior market so you have normal runoff, too.

I would also point out that when we report a new annualized premium, that does not include, in most cases, that is our new sales.

Right. Ed, this is Scott. We've -- as Bill reported, we've seen an increase, period-over-period, in new sales at Bankers and total, including Life and Annuity, was 7% over -- period-over-period. Pretty consistent across all lines. Life Insurance was probably up the most significant amount, followed by Annuities and long-term care. We did see some softening in new sales in our Medicare Supplement line, but that was because in our first quarter of '04, we had some extraordinary group business that wasn't replicated in the first quarter of this year.

But overall, we're very pleased with the trajectory and the trends of our new sales at Bankers.

And very pleased with our product mix.

Okay. I guess I was also trying to understand some of the -- are there some seasonal issues here, in terms of the new first-year premiums? It looks like they've gone up consistently through the year last year and have come back down but are up clearly year-over-year.

Yes.

There is seasonality. It builds throughout the year. The first quarter is usually the lower quarter.

Yes. Typically, we see the first quarter as being, of the four quarters, as being the softer quarter. Second and third are pretty consistent and fourth quarter's traditionally big. And that's our captive agents' focus. They're on a calendar year and they close the year strong to achieve certain recognition and award levels.

Okay. Got it. Thanks, guys.

Our final questions comes from Thomas Gallagher of CSFB. Your question, sir.

Just two quick follow-ups. One is, Gene, I just want to make sure -- this is kind of a technical question, but the 7 to 8 million cost you talked about from refinancing. Is it -- should we be thinking about a one-time charge, operating earnings in 2q? Or should we be thinking about something that gets amortized and expensed out over a multi-year period? Or a multi-quarter period, rather?

No, it relates to the existing facility. To the extent to which the existing facility is no longer there, we have to accelerate amortization and write it off in the context of the refinancing. And whether or not it's the full amount or only a portion of it will depend on what kind of a refinancing we do. At the end of the day, we'll end up with some level of senior debt with presumably participation of the existing syndicate. So it depends on how much of a change it is whether or not accounting rules require you to amortize it -- accelerate amortization or continue to amortize it over the life of the refinanced obligation.

So, we don't know what we're going to do yet so we can't tell you. But at some point, if we substantially replace that facility, there will be a charge in the current period.

Got it. Okay. And just one other quick question. I know you've been doing the asset repositioning and that showed up in higher net investment income this quarter. Is that pretty much done or is there a chance to continue to boost portfolio yield? If you can just comment on where portfolio yield is now and kind of how you see that progressing in light of where your new money rates are.

I would invite our President of 40/86, Eric Johnson, to address that question.

Yes. The -- as I'm sure you all know, we're calling -- portfolio repositioning is a continual process, really, which is influenced by relativity as well as -- [ No audio ]

Ladies and gentlemen, please remain on the line. The conference will resume momentarily.

Hi, everyone. Sorry. We inadvertently were disconnected here. Eric, I think you were in the middle of an answer.

Yes. I'm sorry about that. I think the -- what I was saying is that the -- we've continued since the first quarter ended to do, in essence, a slight lengthening in certain portfolios to better match assets to liabilities which will have the benefit of creeping out the yield curve. Now, the yield curve is a little bit flatter than it was during the early part of the year. So the income benefit will probably be less than in earlier parts of the year, although the underlying activity continues.

The other influence at work there is that on a relative year-over-year basis, you'll probably see a lower level in the market in general of prepayment, which may have the effect of negatively effecting investment income, '05 versus '04. So, net/net, the trend that you saw in the first quarter is still at work, although, may have perhaps a more muted impact in the second quarter.

We do have one more question from Mark Finklestein of Cochran Caronia. Your question, sir? Mr. Finklestein, your line is open. It appears he may have stepped away. At this time, we show no further questions in the queue.

Okay. Thanks, everyone.

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