CNO Financial Group Inc (CNO) 2005 Q2 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 mode. A question-and-answer session will follow the presentation. [OPERATOR INSTRUCTIONS]. Thank you for your attention and here is Tammy Hill.

Good morning and thanks for joining us for Conseco's conference call. Before I turn it over to the management team just a couple of the reminders. We'll be referring in the call to information contained in this morning's earnings release. You can obtain the release by visiting the news center section of our website at conseco.com. We expect to file our Form 10-Q on Monday August 8th. 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 statements.

Please refer to this morning's earnings release to our latest Forms 10-K and 10-Q for additional information concerning the forward-looking statements and related factors. On the call this morning are Bill Kirsch, Conseco's CEO; Gene Bullis, Chief Financial Officer; Jim Hohmann, Chief Administrator Officer; Scott Perry, Chief Operating Officer of the Company's Bankers Life segment, and Mike Dubes, President of the Company's Conseco Insurance Group segment. Also on the call this morning are Eric Johnson, President of 40/86 Advisors the Company's investment management subsidiary, and Russ Bostick, Chief Information Officer.

And now I'll turn the call over to Bill Kirsch, Conseco's CEO. Bill?

Thank you, Tammy, I'm very pleased to report our 7th straight quarter of strong earnings. Net operating income for the second quarter of 2005 was up 58% to a record $74.1 million. Net income applicable to common stock rose 76% to a record $78.6 million. EBIT, which factors out the impact of dilution and reduced interest expense from our recap in mid-2004, rose 11% compared to the second quarter of 2004 to $146.2 million. Operating income per share rose 25% to $0.45, and net income per diluted share rose 41% to $0.48.

Our team's determined focus on execution continues to build financial strength. We ended this quarter with a book value per share of $20.21, up from $17.89 at June 30, 2004. Our balance sheet today as no good will; low leverage with a debt to cap ratio of about 17%, and a high quality investment portfolio with 96% of our fixed income investments rated investment grade. While we have not yet completed our stat financials, RBC at 6/30/05 is expected to grow to 325% or better. We are gratified that our steady progress is being recognized by the rating agencies. As many of you know, within the past several days Moody's, S&P, and AM Best have each put our insurance financial strength ratings on positive outlook.

In a few minutes I'm going to ask Gene Bullis, our CFO, to give you the details of our strong second quarter financial performance. But before I turn it over to Gene, I would like to cover a few more highlights of our second quarter. Our key initiatives continue to provide us with the focus and discipline to improve both short-term and long-term performance across all of our businesses. They are designed to build long-term value for your shareholders, policyholders, and distribution partners. Our first initiative is measured sales growth.

With Conseco's total consolidated sales up 10% versus 2Q '04 we continue to achieve measured sales growth in products where we can compete profitably today and which will serve as a foundation for a family of future products. We are well positioned to capitalize on growth opportunities across our three distribution channels, including captive, independent, and direct sales. In the Bankers Life segment total sales were up 11% over 2Q '04. Our captive agency distribution at Bankers Life is enjoying healthy sales trends with total sales up 12%, and the direct channel at Colonial Penn posting a 9% sales gain.

At Bankers, production at the 25 branches added since the beginning of 2004 is ahead of plan, as is overall agent recruitment. As of the end of the second quarter, Bankers agent force stood at 4,500 members, up from 3,800 at the end of second quarter of 2004. Bankers sales results are especially gratifying to us in view of the competitive market for Medicare supplement and long-term care, and our price increase on long-term care new business which has now been implemented in 46 states. I want to complement our Bankers team and all of our agents for a successful rollout of the price increase in our long-term care new business.

In the Conseco Insurance segment, total sales were up 6% over last year. Conseco Insurance launched three new products in this quarter: the Conseco Patriot, a flexible, premium indexed annuity; the True Level Choice 5, a short-term, multi-year guarantee fixed annuity; and a Worksite Universal Life product. We are making good progress in expanding our network of producing distribution partners, and we are in advanced discussions to enter into national distribution agreements with industry leading IMOs.

Our second initiative is operational excellence. We continue to make progress improving our operating platform designed to provide excellent customer service in a scalable, low cost environment that will accommodate anticipated revenue growth over the next several years. At Bankers, highlights for the quarter included positive results from a LOMAcustomer survey that ranked Bankers second in it's peer group in customer satisfaction. In Conseco Insurance Group, highlights included substantial improvements in call center support and transaction processing and significant progress on the Transformational Road Map program, a group of projects designed to establish a more effective operating platform.

Conseco Insurance expects to complete three major components of the Transformational Road Map by the end of 2005: an industry-wide workflow automation system, which will provide easy to use system navigation tools for our our customer service personnel; an enhanced call center technology; and improved cash management systems. That leads us to our third initiative, technological excellence. We are consolidating and simplifying data processing and management systems in order to provide better and more cost effective service to policyholders and distribution partners, also with an IM scalability.

I would like to introduce Russ Bostick, our Chief Information Officer, to share his plans for implementing our system initiatives. Russ?

Thanks, Bill. We are continuing to make major investments in systems designed to simplify our operations, improve their cost, and upgrade their scalability. During the second quarter we completed a phase of system simplification that focused on implementing a new life platform and converting life insurance blocks that were the most costly for us to support. We are now focusing our attention on the implementation of a new, enterprise workflow system and the launch of our health system simplification initiative. The workflow platform will span the enterprise and our third-party administrative [inaudible]. It will allow us to better manage work allocation, tracking, and documentation.

We feel that tools like this are essential to managing a diverse portfolio of in-force insurance plans and will enable us to ensure that our experts use their expertise rather than just track paper and e-mail. Combined with policy system navigation tools that reduce the need for training and locate information faster, we believe that we will improve service and lower cost in our policyholder service operations. Even better, these tools apply to all of our product lines, allowing us to provide new products and deliver consistent service.

The enterprise help platform is based upon IBM and proprietary technology. It will address the replacement of several 20 to 25-year old systems that currently support our MedSupplement, Long-Term Care, and Specified Disease product lines. Unlike the life systems simplification, this project will address the improvement of claims and the management of them. It will also address the largest opportunities for expense containment first. But with better tools, we expect to resolve our claims faster and with greater attention to the specific benefits that the policyholder requires.

In order to deliver these significant IT initiatives there are also ongoing projects to improve the cost and delivery capability of IT; specifically, we recently hired an IT service delivery officer who had a prominent role in the success of two different insurance administrative software providers. [Todd Combs] brings us additional expertise and discipline in software development. He will focus on standardizing our IT practices in order to improve quality and productivity.

In tandem, with the expansion of our Indian software development center, now rebranded Conseco India Data Services, we foresee significant improvements in the productivity of our IT staff and improvement in the IT cost structure. And now I'll turn it back to Bill.

Thank, you, Russ. Our fourth initiative is expense management. Consistent with our commitment to become a low-cost operator, we are aggressively eliminating non-strategic costs. All operating segments beat their expense savings goals this quarter through initiatives that have reduced redundancies, streamlined back-office operations, and improved claims processes. I'm extremely proud of our team's execution of tight expense management, which has already delivered $30 million of annual expense savings for 2005, and we will keep pushing hard for additional savings throughout the remainder of this year.

Our fifth initiative is best practices in governance and compliance, and we continue to enhance our internal controls across all of our business activities. Our sixth initiative is to build a unified performance culture and we continue to upgrade and develop our talent across the board. During the second quarter we continued to strengthen our leadership team with the addition of outstanding and proven executives including Mike Dubes, President of Conseco Insurance Group, and Sue Menzel, Executive Vice President of Human Resources. I'm extremely proud to have Mike and Sue join our team. They are experienced, talented, first-class individuals who are making immediate and important contributions to Conseco. We have now added 19 new key executives to our team since August 2004, expanding our expertise and growth prospects.

As we continue to upgrade and develop our talent, we are conducting mid-year performance reviews to further ingrain our meritocracy company wide. In summary, by strengthening our management team and executing over the short-term on hundreds of individual projects focused on achieving our six key initiatives, we are continuing to fundamentally improve our company and build momentum. And now, I'll turn it over to CFO, Gene Bullis, for comments on the financial results. Gene?

Thanks, Bill. As detailed in this mornings press release, net income applicable to common stock for the second quarter was $78.6 million, or $0.48 per diluted common share. Excluding realized investment gains, net income was $74.1 million, or $0.45 per share. Our book value per share at June 30th increased to $20.21 per share, excluding the accumulated other comprehensive income under FAS 115.

We were generally pleased with the quarter's results. We saw slight upticks in our supplemental health loss ratios, but these were offset by improvements in investment income and expenses. Bankers MedSup ratio trended up about a half of point from Q1 to 72.4%. While we had expected this ratio to trend back towards 70, current activity would lead us to expect a little over 70 until expected rerates in Q1 of '06. Bankers long-term care ratios are also up about a half point, interest adjusted from Q1, driven by higher persistency. This should begin to improve as new, higher margin business impacts the book. We are also stepping up our adjudication focus based on experience gained from our closed block claims management initiatives.

MedSup benefit ratios at CIG are pretty much as expected, although earned premium is down, principally as a result of low NAP production and moderately higher lapses. We are encouraged by the building momentum in new business, but it will be a few more quarters before we expect to see real, earned premium growth. Specified Disease loss ratios improved modestly compared to Q1 and we expect to see some additional improvement in the back half of 2005 based on our analysis of claim trends. Our statutory financial statements for the quarter will be filed on August 15the and we expect continued solid results from STAT as well with a combined RBC ratio in excess of 325.

Net investment income showed improvements in all three of our operating segments as a result of higher short-term -- intermediate term market rates of interest, improved duration matching within our product lines and favorable prepayment experience. While overall market rates remain lower than originally expected, our portfolio yields have been relatively stable due to tactical asset allocation changes favoring callable agencies and CNBs . Portfolio quality remains a key driver and our portfolio reflects strong bias towards conservative assessment of risk/reward in today's market. At June 30th our portfolio was in excess of 96% investment grade, the highest percentage in seven years. We also remain cautious in terms of rate volatility and have emphasized an open structure for trades relating to structured securities.

As we announced last week, we are in the process of amending our bank debt agreement and we plan to issue $300 million of convertible debt, the proceeds of which will be used to reduce the bank facility down to $475 million. The convertible debt offering will be made through a private placement and SEC rules preclude us from commenting on the offering beyond what was contained in last week's press release. As noted in last weeks announcements, we expect the refinancing to result in lower overall interest expense and increased financial flexibility. And with that, I'll turn it back to Bill Kirsch for some concluding comments.

Thank, you Gene. Looking forward, Conseco will strive to execute effectively in our key initiatives and we will continue to invest in building a more efficient platform in order to reduce costs, grow sales, and provide excellent customer service. As we do so, our focus will shift from repairing legacy issues toward driving top line growth by capitalizing on our strengthened financial position and our three diverse distribution channels. In the coming months we will announce new products, investments in distribution that will leverage our strengths with existing needs in the marketplace to ensure that Conseco provides value to middle America through our offerings in life, annuities, and supplemental health products. We are committed to institutionalizing operational excellence and the discipline of rigorous expense management across our businesses. We will continue building in our strengths and we will remain resolute in taking the tough actions necessary to increase our productivity and drive increases in sales and earnings in a manner which positions our ability to grow shareholder value over the long term. And now, we will open it up for your questions. Operator?

[OPERATOR INSTRUCTIONS]. Our first question is from Nigel Dally of Morgan Stanley. Your question, please.

[Inaudible--audio difficulties] You mentioned that the increase will likely remain high until January 5th next year, but can you explain why they are coming in above your expectations, this first. Second, on your expense reduction, I know you hit your goal of $30 million, and while you are continuing to look for other areas of reduction does this imply the majority of improvement in operating expense is already reflected in our results? Thanks.

I'm sorry, Nigel, I don't think you were on the line for the first part of your question.

Okay. Let me just restate it. Loss ratios at the Bankers Life, you mentioned they increased and will likely remain high. If you can just discuss why the Medicare loss ratio was coming in above your expectations.

Specifically, it's a phenomenon that we internally call "exhaust claims," which reflect the claims that occur after the Part A Medicare benefits are exhausted, and we have seen an uptick in that experience. It's choppy. It's not something that is consistent and moves around quarter to quarter, but we have seen an uptick in it and I think we're still cautious about what effect that's going to have for the back half of the year.

And on expenses, we are proud of our execution on eliminating non-strategic expenses and we are continuing to identify additional cost takeout opportunities, and we don't believe that we have already implemented all of our opportunities for 2005.

Okay. I guess I'm just trying to understand of the expected expense reductions which you are looking at in 2005, how much of that is already in expectations and how much should we be expecting as a further improvement to operating earnings going forward? I don't know whether you can quantify that.

Well, I would say we're not prepared to quantify any more than I think than we have already expressed. The expense trends are encouraging, we're very pleased with our progress to date and we expect to continue.

Okay. Fair enough. Just one other follow-up on the Medicare supplement market. Some of your competitors are complaining of an increased competitive environment for this product with new entrants and price competition emerging as sizable challenges. I'd be interested in whether you agree with this assessment or whether you have a different take on industry conditions?

Industry conditions are competitive, I think that's an accurate assessment. But I guess our judgment is that all markets are competitive and you need to be strategic and effective and low cost. And we are building a team and a platform, and sales plans to be effective, and I think that's reflected in our sales growth.

We are encouraged by our sales trends in the Medicare supplement market. We enjoyed growth at Conseco Insurance Group in the order of magnitude of around 5% compared to the second quarter of '05. And at Bankers, MedSup sales were actually up 15% --I'm sorry -- over the second quarter of '04. So while it's a competitive marketplace, I'm pleased with our ability to compete in that market.

So is it fair to say that the marketplace has always been competitive and remains competitive and you still continue to compete quite effectively, given current market conditions?

I'm still looking for the marketplace that isn't competitive. For better or worse, it's a competitive world and there are low barriers to entry in all of these product offerings. MedSup has lower strength so less strong recapitalized companies can enter, and they are entering, and as a result we need to be quick to rotate to other parts, other plans, other markets. And fortunately our captive channel is doing a very nice job, and our independent channel is also doing a nice job, and I think the sales trends are very positive.

Okay. That's very helpful. Thank you.

Yes, I'm very pleased with our team's ability to compete in a competitive market.

Our next question is from Randy Simpson of Goldman Sachs. Your question, please.

Good morning. Just a couple of questions. First, Bill, if you can just talk about how you feel about the positive outlook from AM Best and then speak to the timing for a full upgrade. And along those lines, your understanding of the timing for the full upgrade to A-, and along those lines, can you actually size what your thinking is right now about the additional earnings power for Conseco when you actually do get the upgrade? And I have a couple of follow-ups.

I'll try to take them in order. First, we are very pleased that our positive momentum is being recognized by our rating agencies, and in particular, AM Best has done a lot of work and has come to the conclusion that we are on a very good trajectory, that our operational improvements are solid, that our management team is building momentum in executing on our plans, and overall, it is a credible recognition of our continuing momentum. I believe it will help our recruiting at CIG and at Bankers, and the real question is when will they review us for future ratings actions. And I would expect -- while I can't control what they will do -- I would expect that they would review us during the next ratings cycle in 2006.

And because we are unable to comment on 2006 outlook, I don't think it would be appropriate for us to start speculating on what the earnings impact will be. However, I will tell you we are making steady progress in building our back office to support a front office that will roll out additional products that we can compete with once we have an A category rating.

Okay. Thanks. And then just two other follow-up questions, or different questions. On MedSup, if we can go back there for a second, can you talk to how you all think about your in-force business versus new sales? Our understanding was that you planned this market opportunistically and really used the product more as a door opener with clients, rather than a stand-alone or key profit driver. Is that the way you think about it?

And then the second question, my last question, is on the guidance you stated with at least $1.68. I'm wondering if you can just comment a little more on the outlook and why you kept it so low, given $0.86 in the first half? Thank you.

Well, okay. I'll try again. MedSup, couple thoughts. Number one, in the independent channel it's not a door openers for us, it's a line of business. And independent agents really focus on supplemental health products and in particular, many of them focus on MedSup and we are very busy recruiting IMOs, working with existing IMOs, working with existing agents and recruiting new agents to write our MedSup business. So that is an effort in and of itself.

In the captive channel, it is, I guess, serves more than one purpose. It not only serves as a door opener, but it is a profitable product in and of itself and our agents enjoy selling it. And some of our agents actually focus on selling it. So region by region, office by office, agent by agent, they have their own view on whether MedSup is a product they want to feature and focus on or use it as a door opener, and we try to give our branch offices in our territories the freedom of flexibility to make those strategic decisions based on the tone in the marketplace and the demographics of the markets they are competing in.

With respect to earnings guidance, we are very pleased with our performance in the first half of 2005 and we are continuing to execute against our 2005 business plan. We are not changing our business plan as a result of our positive performance year-to-date, and our performance has given us the momentum required to accelerate investments in our business, which we hope to implement and expect to implement in accordance with our existing business plan and in tandem with our existing business plan. And with that, we stand by the outlook we provided at the beginning of the year.

Thank you. That's very helpful. I appreciate it.

Thank you.

Our next question is from Jukka Lipponen from KBW.

Yes, thank you, it's actually Kyle Mitchell. My question is actually regarding Plan D. I believe you mentioned that you were looking for a partner. Can you give us some -- any more information on that?

I would ask Scott Perry to comment on what we're doing in Part D, and Scott?

Sure. Thanks, Bill. At both Bankers and CIG we see a big opportunity in offering Part D, PDP product, to our over 500,000 eligible customers as well as the thousands of new prospects we see every month. To that end, as you noted, we are in the final stages of negotiating a partnership that will allow us to offer a co-branded Part D product that will allow us to generate income through sales fees and to meet the needs of our marketplace. We expect to be in a position to offer -- to announce this partnership later this month.

Okay. Thank you.

Our next question comes from Vanessa Wilson of Deutsche Bank. Your question, please.

Thank you. Could you just go back a little bit on the Bankers Life Medicare supplement loss ratio? I didn't hear -- or didn't understand -- the one time --I'm sorry -- not the Medicare supplement; the long-term care. The reserve adjustment that you took, would that have been reflected in the loss ratio you reported or was that loss ratio excluding that?

Gene, would you please take the lead in answering that?

Yes. The loss ratio would reflect that adjustment, that's right.

So the loss ratio in long-term care was 92.6, and so it would have been benefited by $6 million?

Yes.

So it would have been even higher than 92?

That's correct. Analytically, that's true.

Okay. And so --

I mean, I would have to caution you against extrapolating and coming to that conclusion.

And why is that?

Because there are a number of factors, obviously, that get taken into account, and it's -- all of those factors need to be taken into consideration, which we did in the quarter, and we think the loss ratio accurately reflects where we are and where we're going.

Okay. So the loss ratio was adjusted for the $6 million? It does not include it?

No, the loss ratio that's reported in the investor pack and in the press release is the calculated loss ratio including that benefit.

Okay. So if you had not reduced reserves by $6 million, the loss ratio would have been higher; is that correct?

That's correct.

Okay. Now, my question is regarding the loss ratio, could you just go over again what is driving that loss ratio and how we should think about it going forward. It is interest rates? Is it incidents rates? Is it size of claim? What's happening there?

Morbidity is behaving relative to expectation. The real issue, or the most significant factor, is persistency.

So the persistency is higher?

The persistency is higher so that in your reserving methodologies you expect a certain level of lapses which releases active life reserves into the loss ratio, and we haven't had as much lapse as we modeled in our reserving assumptions.

Okay. And could you just talk more about --

And that's certainly not exclusively a Conseco issue --

Yes.

-- that's an industry phenomenon.

Yes. I agree. Could you just talk about lapse experience more broadly, in terms of your MedSup policies both at Bankers and at CIG, what the lapse experience has been like?

Lapse experience at Bankers is very consistent and stable. The lapse experience at Conseco Insurance trended somewhat favorably from Q1 to Q2.

Are you talking about MedSup?

MedSup.

And "favorably," does that mean it was higher or lower?

It was lower --

Okay.

-- compared to Q1 and is still running moderately ahead of expectations.

Okay. So for CIG MedSup you kept more business on the books and that was good news?

Well, we kept more book -- the lapse rate was lower than it was in Q1.

Okay. Okay. Thank you very much.

Our next question is from Mark Finkelstein of Cochran Coronia. Your question, please.

Hi, good morning. Actually, I wanted to go back to the answer that you just made on the long-term care Bankers channel. Was there a catch up adjustment regarding higher persistency that affected the loss ratio?

We didn't change assumptions in our outlook relative to persistency, but simply a phenomenon of more members at the end of the period than we had modeled. So there really wasn't any catch-up adjustment.

Okay.

Just exclusive to the persistency in the quarter.

Okay. I might follow-up as well on that. And then just on the Part D you mentioned sales fees, some of the partnerships that are being announced by others include some sharing of the risk, a la 25% or what have you in terms of a reinsurance arrangement. Do you plan on doing a similar type of a thing or will it be purely a fee business for you?

We are exploring ways to capitalize and maximize our opportunity in the space. We have been recruited by several players in the industry that like the prospects of partnering with our distribution channels. The discussions that are currently progressing are confidential, so unfortunately we cannot comment specifically but we are exploring all options.

Okay. Fair enough. And then just finally -- and I apologize if you mentioned it in your opening remarks -- but what percentage of the new Bankers sales on long-term care were with the higher priced product versus the older product? I know last quarter 90% of the business was priced with the older product. I'm just curious how that evolved in the second quarter?

Well, it has now been rolled out throughout 46 states, and we have general calculations that would say that the sales in this quarter, on an adjusted basis, were running roughly 70% of new sales being at the new priced product. And so that's why we are very gratified that that roll out has been implemented successfully, and it was through a very careful and thoughtful mitigation strategy by the Bankers team.

Okay. Thank you very much.

Thank you.

Our next question is from Thomas Gallagher of Credit Suisse First Boston. Your question, please.

Good morning. First question, Bill, is on the comment you made that you are in advanced discussions with several national IMOs. Is it fair to say that even if you get those lined up that there won't be material sales until you get to that A- AM Best level, or are you optimistic that perhaps you do have some products that you can actually start to get some of these organizations to sell in advance of that?

Thank you, Tom, that's an excellent question. We have been calibrating our discussions with these national distribution partners in kind of a phased orientation, where we are looking at their distribution capabilities and our product offering and we are combining products that we can sell currently with products that we will build over the longer term. And so we would expect that -- and again, it depends on the distribution partner that it is a combination of the two.

It will be people who are attracted to our company based on our financial strength and our ratings today. And, obviously, all of these discussions took place before we received the positive outlook from the rating agencies. And they see a very compelling value proposition for us today because our financial strength is something they can sell to their customers in the context of our current rating that positions us differently than other B++ companies.

So they like that. They like our capital position. And more importantly, they like our new team, and the new team in the independent channel has a terrific reputation for integrity, credibility, and success, and that is attracting distribution.

Got it. And, Bill, would it be -- specifically, if you talk about the products you expect to potentially launch through these new relationships, would it be equity-indexed annuities or could you elaborate a bit on what products you think you can sell through those channels?

I'm going to make an initial comment and I'm going to offer up Mike Dubes to speak on this, our new President of Conseco Insurance Group. But it will run the gamut; initially, include MedSup, annuities life, et cetera. Mike, if you could offer a more insightful view I would very much appreciate it.

Yes. This is Mike Dubes. One firm will be strictly annuities, and they have quite a large following throughout the US and we're in the process of finishing that relationship up. Another firm that we're in the process of signing agreements, [Jim Hohmann and I and Brad Corbin] worked on the final couple sentences last night and they were fine with me. And that agreement should be signed today. They have a tied distribution to them, about 1,400 salaried, or statutory, employees.

That firm is interested in health insurance annuities and they are shipping to me today two life insurance [inaudible--audio interference] that they would like to see up develop for distribution. So that firm would be in all our product lines that we manufacture, not just annuities, where the other firm would be strictly annuities.

Got it. Okay. Thanks. The next question I just wanted to focus on is a little bit more on long-term care. Now, I know you took the reserve release in Bankers, but one area I have been doing a little more work on is the runoff business and the reserve associated with that. Now, my recollection when you came out of -- first emerged from bankruptcy was fairly conservative assumptions built into that reserve.

Given that you've seen a pretty significant improvement in the loss ratio, is it fair to say that at some point in time you'll need to revisit those reserves? Because I think right now your GAAP reserve is roughly $700 million larger than your statutory reserve. So can you just comment on balancing those issues out and when you may or may not not want to address those reserves?

Well, it's a FAS 60 product so it would be inappropriate for us to change assumptions [inaudible--audio interference] development of experience unless we had issues with respect to margin, or there were other events that would produce an unlocking. So I wouldn't expect any one-time adjustments relative to our active life reserves.

I think claim reserves is a function of claim development, and as claim development reflects improvements from claims adjudication then it's possible to change the underlying assumptions in your claims reserve and we might see some of that. But in terms of the big -- the large difference between GAAP and stat, which to some extent is also offset by the amount of VOBAon that, so you really have to look on a net basis.

I think that we would just continue to see that track, we continue to address the adequacy of our stat reserves with gross premium tests and continue to conclude that our stat reserves are adequate. So we don't see any real change in that dynamic, certainly in the near term.

Gene, is it fair to say that if you do see a positive variance between the GAAP versus stat that it's going to more likely run through as quarter-over-quarter changes through operating earnings on a GAAP basis as opposed to any kind of reserve adjustment?

Exactly. I would expect that to be the case.

Okay. Thanks.

[OPERATOR INSTRUCTIONS]. Our next question is from Richard Haydon of Omega Advisors. Your question, please.

Good morning. A couple questions. Your GAAP taxes were $0.28 a share for the quarter. What were the cash taxes, and an update on the NOL situation?

Gene will talk about the first part.

Cash taxes are essentially zero, so the full amount of the GAAP tax provision is reflected as a reduction in our deferred tax asset and we have no current tax -- no change in our current tax liability.

And in terms of the status of our NOL, we actually had discussions with the IRS in July to make progress on our issues with the IRS. The discussions were very helpful and they constituted the first meaningful steps towards coming to an agreement with the IRS. And the current position is that they are not adverse on 382, but they are tentatively adverse on the life, non-life issue. So we continue to work this issue consistent with our prior outlook.

Thank you. Second question, what sort of embedded ROE is included in the new long-term care policies that are written?

I would prefer to in all fairness, from a competitive standpoint, to decline to answer that question.

Okay. And then for Gene --

Thirty percent more than it was before we changed the rates.

Hope so. At least.

And I know you can't answer questions on the convert, but as an addendum to your comments you indicated that it provides you with increased financial flexibility. Could you delineate some of the components that you view as part of that flexibility?

Well, we have had a launch call that was a public conference call for interested participants in the facility where we outlined highlights of expected components of the amendment, which would include changes in the existing covenants. And, specifically, we are seeking to increase our flexibility in the area of the agreement called "restricted payments," which would include dividends and share buybacks.

We're looking for some modest reduction in those restrictions, recognizing the existing credit profile of the business, and -- but -- that would enable us at some point to change -- to not have a prohibition and at some point to change our policies in that area moving forward.

Although I would be quick to add that while we are continuing to work through our goal to achieve higher ratings, we would view paying dividends or implementing share repurchases to be inconsistent with that objective.

I think that near-term that's probably a correct observation.

Yes.

Okay. Thank you very much.

Thank you.

Our next question is from Mike Hallet of Endeavor Capital. Your question.

Good morning. Another couple follow-ups on the Bankers Life long-term care. My first question is I was wondering if there was any change or progression in your thoughts on repricing any portion of your long-term care in-force at Bankers? And second, I had a follow-up on the last callers question relating the new pricing structure in long-term care. And I was hoping you could give us a little more flavor in how we should at least think about the differential in profitability, or at least in loss ratio expectations, for the new business in long-term care versus the existing profitability, at least in what we're seeing in the quarterly numbers today?

I'll answer the first part and then turn it over to Gene and Scott for the second part. As it relates to in-force, we continue to actively manage our in-force as one of our key initiatives. We are continually monitoring, assessing our in-force performance relative to market dynamics and we will continue to do so. And Scott and Gene, if you would like to address the second question.

As Gene mentioned earlier, we expect that the new product that was released with the higher price to produce higher margins and ultimately a better ROE. We also -- I think it's important to note that we tend to have a more conservative and less risky portfolio of new sales. We sell less of the lifetime benefit plans, virtually none, and less of the inflationary plans, two of the plans that tend to be higher cost and considered riskier in the industry. And we're comfortable that the new higher priced products are going to perform considerably better than the book. But it will take time for that new business to build on the book and affect it overall.

Okay. Can you give us a sense of when we might start to see some of the benefits of the higher priced business work their way into the benefit ratio.

Well, I think based on our existing levels of productions you can model it. Frankly, the increment of new premium into the book is relatively small starting out because it's such a large book. So it takes a fair amount of time before a new business really starts to impact the loss ratio for the book. Recognize, also, that there are several other components that drive the outcome; significantly, investment income.

And as we start to see -- we would expect to see over time with improvement in new money rates that that would have an impact on the profitability, because we have such a significant amount of FAS 60 liability there that with improvements in yield that would help the profitability of that book. We're also focusing, as we said before, on claims management, claims adjudication. We think that that also has -- we have some expectation that that will benefit loss ratios as we look out into the future.

Okay. Just one final follow-up question. Can you comment at all if there have been any developments in Washington in terms of increasing the affordability of long-term care insurance or what the prospects of that are through tax breaks or other things?

You know, I'd probably say we prefer not to comment on legislation that's at this point really prospective.

So there's nothing new that has emerged that has changed your view on that at this point?

There continues to be a number of proposals floating around, but given the nature of the agenda in Washington, it's unclear which of those, if any, is going to pick up traction.

Our position is supportive, obviously. And we are confident that there is some opportunity for the expansion of the partnership programs that are state by state programs, and we are continuing to line up behind that initiative because we believe that that's the reality of being expanded beyond the four states that exist today.

All right. Thanks very much.

Our next question is from Thomas Gallagher of Credit Suisse First Boston. Your question, sir.

Just a follow-up on the NOL issue. Bill, you had mentioned the IRS, at least in preliminary discussions, appears not adverse on 382, tentatively adverse on life, non-life. Can you just remind us the way you sort of think about the pecking order, how important each of those is to you in terms of potential usage, or at least just give a little color around what you have been thinking all along and what that might mean for Conseco? Thanks.

Sure, Tom. Our view is that 382 would have an absolute limitation on an annual basis of how much of that NOL we could essentially take advantage of over time, and that would be irrespective of the products we sold. And so that was, on the pecking order, a higher priority item and one that we actually did have more comfort based on our legal position was, I guess, more solidly in accordance with applicable precedence that we would prevail on that issue.

The life/non-life issue is an important issue as well. However, with that said, it is really a question of which products we would be able to utilize against the NOL as opposed to the total capacity of the NOL, if you will. So 382 addresses total capacity, and then life versus non-life is the products that we could sell to deploy utilization of that NOL.

So we are feeling very good about our position on 382, which means there would be no annual limitation. And the only limitation could be along the lines of life/non-life, assuming that the IRS continues to be adverse to us, and it is entirely possible that this discussion could continue for another year or more.

So is it -- from a timing standpoint I think the last comment you had made on this was you expected to hear at some point in the third quarter. Is that still the expectation, at least in light of 382? And do you think you'll then, perhaps, have a longer series of discussion on the life/non-life? Is that what I'm hearing from you?

Generally, yes, with the qualification, of course, that it's always difficult to try and pinpoint IRS activity within any given quarter. So we are engaged in discussions with them. They are moving forward with us in a constructive fashion and we would hope that sometime during this year we would have some clarity on the 382 issue and continue to make progress on the life/non-life issue.

Got it. And then just one last question. If, in fact ,you do get a positive rolling on 382 and it's still unclear about life/non-life, I imagine you are already thinking about which products you would look to emphasize to utilize that tax benefit. Any thoughts in terms of recent initiatives or developments, just purely related to the tax aspect?

I would say you are correct in observing that we will, essentially, align ourselves in a manner that we think maximizes our opportunity to create shareholder value, and that would mean finding opportunities to utilize that NOL sooner, rather than later. And if there is a limitation on life, then we would look for opportunities and we're currently exploring opportunities to utilize the non-life feature within a reasonable period of time.

Great. Thank.

Thank you.

At this time I show no further questions.

Thanks, everyone.

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