CNO Financial Group Inc (CNO) 2005 Q4 法說會逐字稿

Welcome to the Conseco teleconference. We will begin with an address by Lowell Short, 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. (Operator Instructions). As a reminder, this conference is being recorded. Thank you for your attention. Here is Lowell Short.

Good morning, everyone. Thank you for joining us for Conseco's fourth-quarter earnings conference call. I am pleased to have on the call with me this morning Bill Kirsch, Conseco's Chief Executive Officer; Gene Bullis, Chief Financial Officer; Jim Hohmann, Chief Administrative Officer; Michael Dubes, President of the Company's Conseco Insurance Group segment; Scott Perry, Chief Operating Officer of the Company's Bankers Life segment; and several other executives.

During this call, we'll be referring to information contained in yesterday's earnings release. You can obtain the release by visiting the Company News section of our website at Conseco.com. The 10-K will also be available through the investor section of our website when it is filed on or about March 10th.

Before we begin, let me remind you that 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 (technical difficulty) and the related factors.

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

Thank you, Lowell, and good morning. First, I'd like to summarize financial highlights for our 2005 fiscal year, and then our fourth-quarter performance. For the year, operating income increased 36% to $287 million. Operating income per share rose 17% to $1.76. EBIT rose 12% to $555 million, and net income applicable to common stock increased 25% to $287 million.

For the fourth quarter, operating income was up 1% to $70.4 million. Operating income per share rose 5% to $0.44. EBIT was essentially flat at $130 million, and net income applicable to common stock was $67.6 million, down 12%, reflecting the impact of 2.8 million of net realized investment losses in the fourth quarter of '05 compared to 7.3 million of net realized investment gains in the year-ago period.

As our overall performance shows, we are making substantial progress in building a more valuable franchise. Specifically, for 2005, sales were up 10%. Net operating expenses decreased by $43 million on a GAAP basis. EBIT has increased 12% as previously discussed, and book value has increased 30% to $24.95 per share, primarily reflecting the impact and reversal of a portion of our deferred tax asset valuation allowance, which we will discuss in greater detail later in the call -- hard to imagine that we'll have any questions on it later in the call as well.

As Gene will discuss, our risk-based capital at year end increased 40 points to 358%. I'm very, very proud of these accomplishments which reflect the contributions and results delivered by our team at Conseco today. And I want to thank each of them for their important contributions.

Drilling down a little bit into our performance, we enjoyed excellent sales growth in all three of our distribution channels, including independent, captive, and direct. Conseco sales were up [by] 19% over the prior year's fourth quarter as we continued to make strategic investments to improve our distribution channels, product development, and in-force management.

As CIG's President Mike Dubes will discuss a little bit later, Q4 sales at CIG were up 64%. And as Scott Perry, Chief Operating Officer at Bankers, will discuss, sales were up 7% at Bankers and 27% at Colonial Penn.

In regard to expenses, we'll certainly talk about those a little bit later in the call as well. But we are pleased to have exceeded our expense savings targets for the year. Consistent with our commitment to reduce expenses, we continue to aggressively eliminate non-strategic costs. Each operating segment achieved or exceeded its expense savings goals for 2005 with solid execution on initiatives to reduce redundancies, streamline operations, reduce [span of] control, and improve customer service and claims processes.

Net operating expenses excluding commissions decreased by 43 million as previously mentioned compared with our expense reduction goal of 30 million. And we expect further reductions to be made this year.

Progress continued on our key initiatives and achieving our short-term goal of higher ratings and building a foundation for future growth. To be sure, we certainly have much work to be done, and we are very focused on implementing along our plan.

In addition to increased sales and tight expense management, we continue to address and make progress on Long Term Care and got back Med Supp rate increases, improving production processes and procedures and enhancing operating workflow.

Shortly I'm going to ask Gene Bullis, our CFO, to give you the details behind our financial performance. But first, I'd like to invite Mike Dubes, President of Conseco Insurance Group, and then Scott Perry, EVP and Chief Operating Officer of Bankers Life, to briefly detail their results within their respective distribution channels. After that I will invite Jim Hohmann, our Chief Administrative Officer, to discuss progress on rate increases and our Long Term Care -- [lorda] order implementation.

And now, I'd like to introduce Michael Dubes.

Thanks, Bill, and good morning, everyone. At Conseco Insurance Group, Conseco's independent agent channel, total sales for the year rose by 22% to approximately 69 million, while sales for the fourth quarter rose 64% to 21 million. Our 2005 sales growth was driven mainly by our success in expanding our product offerings, recruiting new agents, building relationships with major distribution partners, and improving agent and customer service. And here are just a few highlights.

In product development, we launched eight new products in 2005, including a Med Supp product, three life insurance products, and four annuity products. We're stepping up the pace for new products in 2006. Eight new products have already been introduced in the first quarter, and there are more than a dozen in development stage for launch before year end.

We have had dramatic increases in agent recruitment across all product lines in 2005. New agent appointments were up 163% in health, 67% in life, and 166% in annuities. Our "Expect Big Things" sales roadshow visited 21 states, highlighted in the last quarter's call, was a strong factor. And we have also expanded and strengthened our regional and home office sales management team to accelerate our momentum in 2006.

We are continuing to reengage previously productive distribution, even as we initiate new relationships with several strong national distribution partners. These partnerships give us the opportunity to quickly expand our market reach. And our partners are providing key support with new product ideas and advertising dollars. We are working to increase our presence in the worksite market, beginning with our tax sheltered annuity product rollout in February of 2006, which we feel will become an important distribution channel for CIG over time. We continue to offer worksite health, life, and annuity products through the more than 18,000 payroll slots across the country.

Lastly, during the year, we restructured operations into three groups -- Agent Care, Policyholder Service, and Worksite, all of which are aligned with our key customer stakeholders. And as a result, we have seen dramatic improvements in all our key service quality measures, even as we have reduced operating expenses and prepared our operating infrastructure to handle the still larger volumes of new business that we are getting.

Thank you, Mike. And I'd like to turn it over to Scott Perry, EVP and Chief Operating Officer of Bankers Life.

Thank you, Bill, and good morning. In the career channel at Bankers, sales grew 7% for the full year 2005 to 233.6 million over the prior year. And sales for the fourth quarter increased by 7% to 61.3 million. That growth primarily came in our Med Supp line, which was up 47% versus Q4 '04 and 10% for the year as a result of increased agent recruiting, improved lead volume, and early introduction of Plan J in some states.

Life sales increased 15% over Q4 '04, and were up 36% for the full year, reflecting the purposeful rotation of our agent force to a more balanced mix between health, life, and annuity products.

Sales for the quarter for fixed annuities were affected by rising CD rates declining 7% from a year ago, but up slightly for the year. Long Term Care sales were down 16% compared with the prior year's fourth quarter reflecting our agents rotation towards Med Supp and life sales, and the effect of our new product price increases. However, for the year, our Long Term Care sales were down 5%, very much in line with the industry's rate of decline.

Continued strong recruiting helped increase Bankers' agent force during the fourth quarter by 5% to 4,370 from 4,150 in the fourth quarter of 2004. During the fourth quarter of 2005, Bankers introduced two annuity products, a new equity index annuity, and a five-year fixed annuity designed to compete against the CD market. In the fourth quarter, sales from these two products represented over 25% of annuity sales.

We are also very excited about launch of our new Medicare Part D prescription drug program, which has been well-received by our Bankers branches across the country. As a reminder, Conseco's current Part D PDP strategy is not to invest the millions of dollars that some others did to build out our own PDP management and infrastructure, but instead to partner with a license provider, Coventry Health Care, and leverage our distribution capabilities. Through this partnership we are able to offer our distribution channels a competitive product set and generate income through distribution fees and through a quota share reinsurance arrangement.

To date, our career and independent channels have enrolled over 120,000 members, making us one of the top PDP distribution organizations in the nation. Because we are not a licensed PDP plan, we were not awarded any dual eligibles.

At Bankers, our initial PDP focus was on assisting our existing policyholders through the purchase decisions surrounding this new product. The outcome of these efforts was that roughly 60% of the Part D sales were made in a household with a core Bankers product. Our many new Part-D-only clients increase our current market penetration and provide us the opportunity for core product sales in the future.

From an earnings perspective, because front loading of commission expense impacts both net fee income and quota share income, we expect a minimal earnings impact in 2006, improving in 2007 as acquisition expenses diminish. Overall, we are very pleased with our sales results and the performance of our career distribution organization, and we're seeing this very strong momentum carry over into 2006.

At Colonial Penn, our direct channel, total sales for the year were up 13% to 30.2 million over 2004, and sales for the fourth quarter rose 27% to 7.2 million over the year-ago quarter through increased advertising activity. Bill?

Thank you, Scott. Now I'd like to invite our Chief Administrative Officer Jim Hohmann to talk about progress on Long Term Care and Med Supp rerates and give us an update on the fourth quarter. Jim?

Thanks, Bill. Today, I will briefly report our progress, rerating the in-force Medicare Supplement business at both Bankers and CIG, as well as the Bankers Long Term Care in-force rerate. Finally, I'll provide an update on the implementation of the Florida Insurance Department orders regarding our home healthcare policies in that state.

Bankers Life has a very efficient and proven rerate process for Medicare Supplement policies. At Bankers Life, we have received insurance department approval for 99% of the 2006 rate actions we have filed. The great majority of these approvals had January 1 effective dates. We expect these rate increases to bring our Bankers Medicare Supplement benefit ratio to approximately 70% in 2006.

CIG is also implementing Medicare Supplement rate increases in 2006 with two of the three major policy forms being rerated in the first quarter and the third being implemented in the second quarter. We expect our CIG Medicare Supplement benefit ratio to be approximately 62% in 2006.

As discussed on last quarter's call, after careful analysis, consideration, and planning, we decided to rerate much of the in-force comprehensive Long Term Care and nursing home business at Bankers. The increased was targeted to impact approximately 65% of the total LTC in force. As has the entire LTC industry over the past several years, Bankers' comprehensive LTC and nursing home in force has experienced lower lapses and interest rate declines. We are happy to report that this process is going according to plan with the majority of states already approved, affecting over half of the anticipated financial effect.

Concerning Long Term Care and the Florida orders, you may recall that about 12,500 home healthcare policies in Conseco Senior Health Insurance Company and 4,900 policies in Washington National Insurance Company are governed by orders from the Florida Office of Insurance Regulation, which provide for policyholder election options. The election process has been completed, and rate increases are being implemented for nearly 60% of the policies, while just over 40% elected a paid-up benefit.

For each policy where a rate increase is to be implemented, it will take effect on the next premium due date following the policyholder election. In total, premiums will likely reduce a small amount. However, that is more than offset by the reduction of benefits under two of the three options. Gene will comment on the accounting implications in a few minutes. Bill?

Thank you, Jim. And now, I'll turn it over to our CFO Gene Bullis for his comments on financial results.

Thank you, and good morning. As detailed in yesterday's press release, net income applicable to common stock for the fourth quarter was 67.6 million, or $0.42 per diluted common share. Excluding realized investment losses, net operating income was 70.4 million, or $0.44 per share.

Our press release identifies several items impacting results in both this year's and last year's fourth quarters. These items essentially offset within the insurance business segments. The corporate segment reflects current quarter unusual net expense items of approximately 2.4 million after-tax or $0.01 a share.

Our book value per share at year end increased to $24.95, excluding accumulated other comprehensive income under FAS 115 -- an increase of 30% over year end book value -- 2004 book value per share. This increase includes the reversal of a portion of our deferred tax valuation allowance amounting to 586 million, reflecting our year-end review of deferred tax recoverability. The valuation allowance reduction resulted from the favorable ruling we received in 2005 in support our position on the Section 382 limitation and the continued demonstration of sustained earnings since emergence.

In addition, although not yet included in our analysis of the valuation allowance reduction, we have reached tentative agreement with the IRS regarding the life/nonlife issue, which ascribes 2.1 billion of the Conseco Finance NOL to the Life subgroup. This agreement is awaiting approval by the Congressional Joint Committee on Taxation and a final procedural step with the IRS Appeals Office, which we expect to be finalized in 2006. Upon receiving final approval, we will perform an evaluation of further valuation allowance reductions, considering all facts and circumstances at that time.

The aggregate increase in book value for the year more than offset a modest increase in debt outstanding, reducing our debt to capital ratio to 16%, down from 18% a year ago. Our consolidated RBC ratio increased to 358% from 318% at year end 2004. Bankers Life RBC was 320% at year end, reflecting the impact of the capital infusion we made in December from a portion of the proceeds of the 80 million of additional borrowing.

Turning to benefit ratios, Bankers Med Supp benefit ratio declined by 1.6 percentage points from 71.8% in the third quarter, 70.2% in the fourth quarter. As Jim said, we expect this benefit ratio to approximate 70% for the full year 2006, down from 71.6% for full year 2005.

Bankers Long Term Care benefit ratio was 96.1% compared to 93.9% in Q3, reflecting an approximately 2 point increase in Q4 resulting from a reduction in the discount rate applied to 2005 incurred claims. We expect this ratio to approximate 95% for the full year 2006.

CIG's Med Supp benefit ratio was 58.6% in the fourth quarter compared to 60.9% in the third quarter. We expect this ratio to approximate 62% for the full year 2006.

CIG's specified disease loss ratio increased to 79.6% compared to 75.8% in Q3. This increase includes approximately 6 million of reserve adjustments primarily relating to refinements to in-course-of-settlement estimation procedures. The normalized ratio of 72.9% represents our approximate expectation for 2006.

Our business and runoff benefit ratio was 99.5% in both the third and fourth quarters. In line with our selection of PolySystems as our strategic valuation platform, we converted the valuation system used for the closed block Long Term Care book to PolySystems from the Fresh Start actuarial models for active life reserves we had been using since emergence. And we completed a new claims cost study and developed a new continuum tables which were used to estimate year-end claim reserves. The impact of these procedures was to increase reserves by approximately $2 million.

While these changes in estimates were largely offset for GAAP purposes, statutory results were impacted by aggregate reserve strengthening of approximately $65 million. We believe this strengthening positions the runoff Long Term Care book for improved future statutory results, and we are pleased to have ended the year with a strong RBC position despite the strengthening.

No adjustments were made to the Florida home healthcare block, which was addressed by the Florida Insurance Department's order. On these policies, we are accounting for changes in reserves due to the structural changes arising from the order which would produce, we believe, a modest reserve release prospectively over the expected remaining life of the policies, pursuant to the lock-in provisions of FAS 60 and related interpretive accounting and actuarial guidance.

Net investment income for the fourth quarter benefited only modestly from prepayment activity, which contributed about $3.5 million of incremental yield this quarter net of amortization. While earned yield declined compared to Q3 because of a decline in prepayments, portfolio yield improved slightly to just under 5 65. Our asset allocation strategies are intended to produce modest increased portfolio yields in 2006, although we also expect substantially lower prepayment income compared to 2005. [New] money rates on asset flows are not expected to have much impact on overall earned yield in 2006.

Investment quality remains a key driver in our portfolio. At year end 2005, the portfolio was 96% investment grade. Our gross unrealized losses on below-investment-grade securities, a leading indicator of potential impairments, was only 16.5 million. And we have less than 30 million of exposure to the currently volatile U.S. auto sector.

As mentioned in the press release, we achieved our expense reduction goals in 2005, and expect further reductions in 2006. Our previously communicated goal of 20 million for 2006 needs to be adjusted downward for the impact of implementing FAS 123R, Accounting for Stock-Based Compensation, which we expect will increase expenses by approximately $6 million in 2006.

With respect to 2006 outlook, we currently expect that our 2006 operating earnings will at least meet the lower end of the current analyst estimates published by First Call of $1.85 of net income per share, subject to the cautionary statements included in the press release.

And with that, I'll turn it back to Bill Kirsch for some concluding comments and Q&A.

Thank you, Gene. While we have our ongoing challenges, we are making progress on multiple fronts, addressing and resolving legacy issues in operations, technology, product development, product rollout, product support, Long Term Care claims processing and case management, and Long Term Care and Med Supp rerates. Looking forward, we're going to continue to build on our opportunities and our strengths, and continue to address our opportunities going forward and continue to build for the future.

And with that, I'll open it up for questions.

(Operator Instructions) Jimmy Bhullar, JPMorgan.

I just had a couple of questions. First on just how comfortable do you feel with the underwriting margins in your business? You did give some guidance on loss ratios in the Long Term Care business. They are a little bit higher than where you had the year 2006 -- 2005 came in. Also, you did have an increase in specified disease priority reserves. So if you could just comment on how comfortable you feel that pricing in your legacy or overall Long Term Care and specified disease business and Med Supp is adequate, because I would have assumed that with the rate increases, you actually do get some improvement in the margin. And then I have a follow-up.

I'll comment specifically -- with respect to specified disease, we are very comfortable with pricing, and that product continues to be quite profitable. And we really need to refer to interest adjusted benefit ratios in that case, as that's what really drives the margin.

We did have some -- we worked through some noise in loss ratios in 2005 principally related to significant declines in claim inventories. We think that that's worked itself through, and believe that the loss ratio will stabilize at the Q4 normalized rate.

Which would be ex the reserve increases?

Yes.

Okay.

With respect to Bankers Long Term Care, the benefit ratio reflects the assumptions that are embedded in the active life reserves that were established at Fresh Start. And this rate increase that we have currently keyed up and are implementing is consistent with those assumptions. So there will be minor reserve flow, but nothing that we believe would affect what we think is the underlying benefit ratio.

With respect to Bankers Med Supp, we are expecting an improvement in the benefit ratio, which is driven principally by the rate increases. The benefit ratio for CIG -- while we are expecting it to increase, it's more a function of the interplay within the in-force and the fact that we have increased new production relatively substantially. And as those benefit ratios age out, they tend to improve with policy duration. And the mix is different for '06 than it was in '05.

Okay. And then just to follow-up on the potential for a ratings upgrade, I think in the past you have said you feel comfortable that you are positioned for an upgrade this year. Do you still feel that, and if you do, then what are you doing to prepare for a potential upgrade? Are you already taking some steps that will enable you to sort of hit the ground running as opposed to -- in terms of expanding distribution? And if you could just mention some of the initiatives that you're taking preparing for that.

We have continue to operate in accordance with our plans. And we have been in regular communications with AM Best. And we continue to believe that we cannot speculate on future ratings upgrade.

However, we can comment on the fact that we within our businesses continue to do those things and take those actions that we believe are appropriate. And I think Mike Dubes has identified the new product rollouts and distribution partners at Conseco Insurance Group. And Scott Perry has talked about the opportunities at Bankers. And as we have said in the past, we don't really believe that a ratings upgrade will have an immediate impact on our earnings. Or obviously, we'd like to see an impact on the sales opportunities. We think it will probably have a healthier impact on independent and captive and direct, and we're moving forward.

And would the impact on -- earnings, I understand. But would the impact on distribution, expansion, and sales be immediate, or would that take a while also?

We think that the impact at Bankers would be modest (multiple speakers) more at -- in terms of agent recruiting and retention. And so I'll turn it over to Mike Dubes to discuss his views with respect to the independent channel.

I think there's four things that we're doing at CIG. One is we're preparing ourselves for enhanced capability in Worksite, including TSA rollout. And we think that we are in about a couple thousand school districts now, but we are sort of dormant. And an increase in rating is greatly going to help that business, especially in the transfer business. We've had -- we rolled out these products in March. And we had about 50 agents throughout the United States that are not licensed with CIG that attended that meeting. We are very enthusiastic about it. Some of them are representing some quite large companies that are looking for some new relationships.

The second thing that we're doing right now is that we are in the process of finalizing some arrangements with two big national firms, one on the West Coast and one on the East Coast. And these firms have been in existence for many years that will give us additional distribution. And we are codeveloping a series of products for these companies.

The next thing that we're doing in order to prepare ourselves for this is that we're building out our sales and marketing team in Carmel, and we've been very fortunate to attract some high-quality people that will not only wholesale products for us, but will build out our staff internally.

And the last thing is that we're building out products quite rapidly at CIG. If you look at what we did a couple of years ago, we had four products in 2004, and then I believe eight last year. And those eight last year -- they were 30% of our sales line, which is really good. And so far this year, we've developed -- introduced about another eight. And we have on the drawing boards another 12 that should be out by the end of the year.

So I think we are preparing ourselves for this upgrade, and we are very bullish about it -- on the other hand, that we haven't made any guarantees to these partners of ours that we will get an upgrade. And they are coming to CIG because of all these enhanced capabilities that we are continuing to build out both from a product standpoint as well as a marketing standpoint.

Nigel Dally, Morgan Stanley.

First, congratulations on the IRS settlement. It seems to be a very favorable outcome for Conseco. Assuming you proceed as planned, can you discuss how much of the valuation allowance would likely be released, and what impact that would have on book value per share?

Second, if you can discuss the revenue decline at Conseco Insurance Group. A decline of 11% from the prior year and 5% sequentially seems to be somewhat larger than we expected.

And third, if you can run through the returns on equity you're getting on new sales from the various products -- perhaps if you could rank them from highest to lows, it would help us better analyze the sales results.

Okay, well, good question --

Jam-packed.

First, let me ask Gene to address the question on the valuation allowance, and --

Okay. We approach it in the aggregate first. And then we can drill down a little bit. At year end, after the reversal that we made at the end of the year, there's a valuation allowance of 1.044 billion left. That consists of 485 million that relates to the CFC loss, approximately 400 million related to capital loss carryforwards, and the remainder of some miscellaneous other net operating losses.

If we were making our determination of year end, having the final IRS approval in hand at December 31, we would have released another 275 million of valuation allowance. So the question is what's the remaining? And the remaining is the fact that when we make our tests of recoverability, we have to do certain stressing to our projections. And our base projections indicate that we'd fully recover all of our deferred taxes or utilize all of the NOLs. But after we make certain stressing of those projections, we come out with the need to continue to carry additional valuation allowances.

And I would suggest that one event that will enter into our thinking on that will in fact be the upgrade if and when it occurs. At that point, we would evaluate the impact of that upgrade on the stressing that we have put our projections to.

I would not expect that there would be much realization of the capital loss carryforward, and that's going to runoff in the next couple of years without -- so that the valuation allowance is appropriate.

Revenue decline at CIG -- Gene, if you'd like to cover that or Mike?

Well, it principally relates to the fact that the new business on Med Supp is not replacing the natural attrition out of the book. The [rare] premium specified disease is about flat. So it's principally a Med Supp phenomenon, and we think that that will start to stabilize and turn favorably a few quarters down the road, because there still is -- you know, it's a pretty large book. And new production still hasn't caught up with the rate -- [ex that] it was falling off.

I think you have to look at CIG in context of what it's done the last year. And the growth opportunities there in the marketplace are pretty robust. And some of the stuff that happened previous years are -- you know, we simply weren't able to overcome as Gene talked about in those lapsation rates. And so now we are definitely in a growth mode. And at some point in time, you'll see those in force -- those lapsation rates will continue to improve, as well as our policy, our in-force count will also improve.

And the ROE on new product -- ask Gene and Jim to address that.

Okay. I think in the past week, we've generally been a little bit hesitant about being specific about what the target is. But to answer the question in general, I think, about the ranking, perhaps this is useful -- if you break the product categories into broadly health-related, life-related, and annuity-related, the highest margin product overall and the highest return product overall that we would have in general would be health-related, and specified disease in particular, and then cascading within that category. Life would generally be the second-largest return overall, and annuity running third.

We do have corporate standards around pricing that we adhere to. From time to time, we might make an exception to that. But whenever we do so, we do so with a collar around the production that may be coming in at that time. So hopefully, that's responsive. But we generally try to not for competitive reasons talk about our specific returns.

Sure, I understand. I guess just on the annuity products, based on where your pricing is now versus your peers, are you still planning on providing a -- perhaps if you can just kind of comparatively say where is your pricing versus your peers? Are you still providing a more attractive rate, or are you pretty much in line with your peers now?

In terms of to the marketplace -- you mean competitive products?

Yes, yes.

Mike, I don't know if you want to talk about what you've recently seen. The competitive research that I have seen suggests that we have a competitive product -- not the leading product in the annuities space, but competitive.

We have competitive product, but we are not pricing in the top quartile. And we currently are not running any specials. Major competitors of ours have run specials the first quarter. And word on the street is they're trying to sell six months' to nine months' business in the first quarter. And we do not compete against that, because I think it's a deterioration of earnings. So our products are priced in the top 50%, but not top quartile, and not top 10%.

[Yaron Shashua], Fox-Pitt Kelton.

Just a follow-up question on the valuation allowance -- just going over some of the numbers just to affirm them -- you said it was 485 million left on the CFC loss, and roughly 400 million on the capital loss. And the remainder, which totals around -- which will aggregately equal about $1 billion of valuation allowance you have on your book now. Just want to make sure those two numbers are correct that I received.

And also, when you mentioned the 275 million, you were saying that you would have received that if you finalized approval about the life versus non-life this quarter? Is that correct?

Yes, the reason that we were unable to release that is because there's a material contingency that we might not have the approval. If we had the approval, our calculation would have released another 275 million.

From the 485 million you have left?

Exactly.

Got you. Okay, great. My other question is around your Long Term Care loss ratio, on the rerates -- you mentioned that about 50% of your states have been approved? Is that correct? Or half?

Actually, more than 50% of the states have been approved.

Okay. Then what percentage of your total business that you're rerating had been approved?

If you look at the overall book of Long Term Care within Bankers, the targeted book, or the book that would be affected is about 65% overall. And then if you narrow your attention to the 65%, the comment that I made is that we have filed for our approvals in the various states. We have received approval in more than half those states. Specifically, I think we're in about the 35% range now. And the financial effect that's connected with those particular approvals, I believe, is approaching 60% overall. And importantly, our domiciliary state has approved.

So 35% of the 60%, you're saying?

Yes.

That kind of rate -- okay.

No, I'm sorry. No -- 35 states.

Oh, 35 states --

Yes, 35 states, and roughly 60% of the financial effect is housed within those states.

Okay. Is there any timing about when you're going to get the majority of states approved?

Well, we already have the majority approved. In terms of what we are targeting overall, July 1st.

Great.

Although that's a point in time, and obviously these things span periods of time, so --

Got you. And then I apologize, but Gene, I think you made a comment about increasing your statutory reserves. Is that on the Long Term Care business? Is that what you're saying on the rerates?

Yes, closed block.

Got you. Oh, and the closed block -- that's the Florida order?

Right.

Got you.

No, no, it's not the Florida order. But it is our closed block of Long Term Care. The Florida order would be -- the Florida home health care business is included in that book.

Okay, but it's not on the Bankers segment then?

That's right.

Andrew Kligerman, UBS.

Two questions. First, on the Long Term Care just to follow-up -- with all of these rate increases, Gene, you mentioned that the loss ratio on Bankers LTCI by would stabilize at approximately 95% in '06. That's not down much from the high of 96.1.

If we look out to '07, assuming that you will have received all of the approvals and implemented rate increases, how much further do you think that loss ratio is capable of going down, if at all?

We don't expect much movement from '06 to '07 in either direction.

Okay, is that (multiple speakers) -- what kind of rate increases do these state approvals buy? Are you looking at north of 10%, 20% increases --?

We are north of the range that you mentioned. Gene, you might want to comment to (multiple speakers)

But again, that was -- the rate increases that we're implementing are consistent with what we assumed we would implement when we set reserves at Fresh Start.

Okay, that's right; I do recall that. And with regard to the expense saves, this year, you saved 43 million year over year. Your previous goal was 30 million. And now with '06, you indicated 20 million in savings, but a $6 million number below that because of FASB 123R, you said, Gene?

That's right.

Could you clarify that a little bit more?

Well, that's -- for the first time we have to expense on our income statement the cost of stock options.

Ah, of course.

And that's running through our expense numbers in '06 for the first time. And we think it's appropriate to adjust our expense target for that amount.

Okay. And no falloff, even though you did more than you thought in '05, no falloff in 2006?

Well, in fact that -- if you were developing an analysis of what the expense numbers would be with a $20 million reduction for '06, we are off of a lower base. And we're continuing to commit to a further expense reduction. So the amount that we saved in addition to our goal in 2005 is rolling over into 2006.

That's great. And any chance for any further upside surprise this year, or maybe just too early to say?

We try to manage expenses every minute of every day.

Joan Zief, Goldman Sachs.

I have two questions. The first question is could you talk a little bit about the litigation reserve that you set up -- what does that relate to, do you really think this is a onetime item, or is there something chronic that we have to think about going through 2006?

Then the other question has to do with the Medicare Part D. I understand that you were talking about not material impact to earnings for '06. But could you just give us an idea of what type of earnings or margins you're expecting to earn on that business over time, and what sort of target you might have with how many plans you could potentially sell and sort of the implication of the whole marketing and product move?

Okay. With respect to litigation and the reserve, I would invite Gene Bullis to discuss that. I think I have to say initially that we cannot comment on specific litigation. And it is truly the case that we have litigation that we are managing aggressively. It is disclosed in the 10-K. And I'll turn it over to Gene to discuss the reserving issues.

Yes. The reserve amount that we reflected in Q4 reflects an increase. And we have to apply GAAP accounting for reserving for loss contingencies. And we make that assessment on a periodic basis. This increase relates principally to the litigation matter that we discuss at length in the K surrounding nonguaranteed elements, and it is in fact a class-action. And we have to make periodic assessments of what we believe to be the outcome. So from our point of view, we don't believe it's chronic, because if it were, we would have to have provided more reserve.

All right. So basically what you're saying is it's not as if there is some new lawsuit --

That's right.

-- [purpose] that you are now reserving for?

That's right.

And Part D -- I'd mentioned it won't have a material impact. '06 [in these] 2 to $3 million in earnings -- and again, because marketing expenses, specifically commissions, are front-loaded, it certainly impacts that.

Beyond that we're looking for that in '07 to be doubled -- 4 to 6 million in earnings impact as those acquisition fees diminish. However -- and then beyond '07, I would really -- because it's so dependent upon potential changes, CMS changes that within the program, I'd hate to comment specifically on what we're looking at beyond '07. However, I will say that I think we've clearly demonstrated the strength and the ability of our distribution to kick in and seize the opportunity in the Part D arena. And we kind of showed what we are capable of in both acquiring new prospects and delivering this to our existing policyholders.

Is that a pretax number?

Yes.

Jukka Lipponen, KBW.

A couple of questions. First of all, on the favorable tax resolution, and with respect to the rating agencies, I don't know if you've had any feedback from them previously. I would assume that this would be a positive, considering that this increases your cash earnings?

Well, I would say it not only increases our cash earnings, but it also reduces our leverage. So from those two points of view, it ought to be very rating positive.

Have you had any feedback from them in your discussions?

Well, the only feedback is that I think Fitch is upgrading us today. So we haven't had any subsequent feedback, because we haven't essentially discussed tax matters with the rating agencies yet.

Okay. Second question sort of just in general, I'd like to get some color on how you think about the capital. At what level of capital with respect to the RBC ratio, do you feel you need to be operating at at your desired ratings levels. And then where are you in terms of capital generation versus capital absorption. Obviously, we saw the big increase in the RBC ratio last year.

I don't think we want to get ahead of ourselves here. We are still B++ rated. And it's very, I think, inappropriate for us to be commenting on what-ifs to any great degree. We certainly believe that our capital is more than adequate to support our business objectives. And we would have an expectation over an appropriate time period that we would be deploying that capital in the best interests of the business and in the best interests of shareholders.

And with respect to operating expenses, particularly at CIG, and just in terms of the sort of aggregate dollars, how should we be thinking about from a modeling standpoint how those numbers may be trending as we move forward here?

With respect to expense decreases? Is that --?

Right, the operating expense number.

Well, again, the operating expense number that we reflect in the basic financials includes both -- basically non-level renewal commissions as well as general insurance expenses. And our real management objective is to improve the relationship between expenses and allowables. And as we start to rebuild the business and generate more production and generate more allowables, you would expect the aggregate spending to start to go up again -- although on a GAAP basis, a significant portion of that spending ends up being deferred as acquisition cost. But I would expect that we expect to be a viable, growing business. And at some point, our expenses would start to increase again.

And last question -- with respect to the Bankers Life Long Term Care loss ratio, just to sort of reconfirm what you've said in the past, am I understanding correctly that it's not really the claims experience per se that's been driving the result it's just the fact that the lapse assumption and the investment return assumptions built into the pricing -- those were both higher than what has turned out to be the case -- and that, combined with the fact that you have an aging block?

That's absolutely right. Our morbidity experience is at or better than pricing. And it's the other factors that have produced the pressure on the benefit ratio.

Thomas Gallagher, Credit Suisse First Boston.

I guess I just wanted to hit on some of the tax questions here to make sure I'm getting this. The first question, Gene, I guess is just on the specifics of the valuation allowance. Did you mentioned you had 485 million of the valuation allowance left? Is that all related to the CFC NOL?

Of the valuation allowance remaining of 1.44 billion, 485 million relates to the CFC NOL.

Okay. And prior to the reduction this quarter, you had approximately 930 million there?

Approximately, by -- I don't have that in front of me. But I believe that is the case.

Okay. So basically from what you took down this quarter, only 450 million approximately was related to CFC. So over 100 million would have been related to other issues?

That's right -- our ability to demonstrate sustained earnings and the impact of another year on the forecast.

Okay, got it -- I'm with you. The next question is, the 2.1 billion of CFC loss -- that's a life insurance loss. Can you use all of this first before the limitations would kick back in for the remaining 1.9 billion that's deemed to be a nonlife loss?

Yes, that's how it works.

Okay. So then if I kind of look at -- even assume your earnings don't grow, it's reasonable to think that you all may not be paying any taxes for about 4 to 5 years?

That would be consistent with our expectations. There is one -- there's always something remaining. So there is one remaining wrinkle for those that want to dive into the tax code and consolidated return rates. But -- we will reach a point four or five years out where we have to determine how much of the life NOL was absorbed by the cancellation of debt income that occurred on emergence, which essentially occurred simultaneously on the last day of 2003 or the first day of 2004. And depending on how that allocation occurs, you could be ascribing a portion of the 2.1 billion to having been utilized. And that would be -- if it were allocated on a pro rata basis that would reduce the 2.1 billion to about 1.6 billion.

We don't believe that that's the right answer. We feel strongly, and we have certainly consulted with our tax advisers, that our position, which will be our return position is correct. But it's frankly an area that isn't addressed in the tax code so that we don't have citings or caselaw that supports our position. But on the other hand, we can't find anything that would argue against it.

And Gene, would you expect to get clarity on that when the IRS or settlement is final?

No, it's not addressed in the settlement. And I'd say we won't get clarity on that until we probably file our 2011 tax return.

Okay. And then the next question I had is $1.85 guidance that you have out there for '06 -- does that assume a 35% tax rate?

36.

36. So if I kind of run this through, add back -- I'm getting north of 2.90. In terms of -- if I were to assume you were to pay no taxes, the economic earnings of Conseco for '06 are really more like 2.90 as opposed to 1.85, if you follow where I'm going with that.

Have you all kind of contemplated laying out that issue to investors, just to really make it clear what the underlying earnings power of the company is going to be for the next several years?

We have thought about that and how we would address it. Certainly, the SEC looks very askance at pro forma earnings numbers. So we have to be very focused on SEC disclosure requirements. But the economic reality you've just outlined is the economic reality.

Okay. And one last question. Just the 95% benefit ratio that you're projecting in Bankers Long Term Care for '06 -- I presume that also anticipates the impact of the rate increases? And then a related question, even though that's some deterioration year over year, how does that look on an interest-adjusted basis? Is that kind of flattish with '05?

Somewhat. But the reserves are growing, so we should get some higher interest-adjusted benefit, as well as -- we're able to put some money to work with pretty good duration targets. So I would think the impact would be flat to slightly favorable on an interest-adjusted basis.

Vanessa Wilson, Deutsche Bank.

First of all, I just have to clarify something. Tom's way ahead of me here on these taxes. In 2006, if you record $1.85 of earnings, assuming you didn't pay any dividends or there were no changes in the balance sheet, what would book value go up? Does it go up the $1.85, or something more than $1.85 because of the NOL?

Well, it will go up $1.85 unless we release additional (multiple speakers) deferred tax valuation allowances.

Okay, right. But that's -- that's other things; that's --

That's a separate matter.

A separate discussion.

Right. That's not going to go through earnings.

So the NOL aspect of the $1.85 of earnings is already in the book value now, right?

All but 485 million.

Okay, but -- yes, but then when that's decided, you can get another 275 million of that with the latest IRS ruling?

That's right.

Okay. I think I do understand that part; okay. Now onto my question. There's two areas I wanted to talk to you about. One is Fresh Start, and the other is sort of the statutory picture here.

So with respect to Fresh Start, I understand that the rate increases that you have talked to us about on the various products are already in the Fresh Start assumptions. Could you give us some comfort that as you have had changes in your discount rates or your assumptions about lapses and little bits of reserve changes here and there, that your overall Fresh Start assumptions are still holding, and that there's no need to relook at your DAC and your VOBA?

Well, certainly our overall Fresh Start assumptions on morbidity are holding quite well. Our Fresh Start assumptions on persistency are dynamically adjusted, so there wouldn't be any need to discuss recoverability unless we ran out of margin, which we are nowhere near.

Okay. So that's how we should think about DAC and VOBA?

Right.

Okay. And then on the statutory side, you've given us the RBC ratio. Do you have a rough number for what the statuary earnings were in 2005? I know you did this reserve increase on the closed book.

Without the reserve increase, they would have been flat over 2004. And we look at EBIT before fees at around 250 million.

250, okay.

Right.

And could you just give us a sense of why there was a reserve charge on STAT of 65 and not on GAAP -- like, how they were parallel?

The STAT reserve adjustment models the claim reserve component of the GAAP number, but it doesn't model the active life reserve component.

Mark Finkelstein, Cochran, Caronia.

I actually want to go back to the first question, or the question that Tom asked. I guess theoretically, in looking at the -- call it the $1.85 number, coming up with an economic increase to that, does -- that somewhat assumes that STAT earnings start to catch up to GAAP earnings over time, and that the realization of that tax benefit will ultimately equate. And I guess what I am really asking is based on the increases in both the Bankers channel and what's happening on the Florida home health, is it the assumption that STAT earnings do start to catch up to GAAP earnings?

Well, relative to realizing and recovering our deferred tax asset, we've modeled both GAAP results and STAT results. And we find that the -- we made the stressing modifications to those projections that we talked about. But in the absence of those, the deferred tax asset was fully recoverable on both a GAAP and a tax basis. So that doesn't necessarily mean that GAAP catches -- that STAT catches up to GAAP, because as you continue to grow the business, you're always going to have a difference, because GAAP accounting differs acquisition cost, and STAT doesn't.

So I would say that's not -- that we would hope that wouldn't be the case. Our GAAP earnings will always exceed our STAT earnings. But relative to the earnings from the existing installed base, the existing in force, they will emerge and converge.

Okay. And I'm sorry if you addressed this already. I just want to go back to it. I think you talked about a GAAP reserve release in Conseco Senior Finance related to an unlocking with the Florida home health rerates. Can you just talk about the timing of that, and whether that's a onetime active life reserve decrease, or it's going to happen over time?

Actually, it's just the opposite. As a result of the impact of the Florida order, without implementing what we believe is the appropriate accounting under FAS 60, which is to lock in that reserve position and have it emerge over the remaining life of the in-force policies, there would have been a modest reserve release. But we haven't done that.

It's a little bit difficult for us to exactly quantify that, because we can calculate what the impact is on the option-free elections. But there is also the need to model out the impact of any selection on the option one and twos, and we've done that in a way to aggregate back to the model reserve that would have existed as of the date of the order and also as of the date of the balance sheet.

So we have aggregated that. And essentially, we'll remodel those reserves to emerge as the in-force runs off. And it's really a function of how quickly that happens. And since a significant portion has elected to pay the benefit, the runoff would be through mortality.

Okay, that makes perfect sense. And then finally, on the forecast for the CIG Med Supp loss ratio of 62 -- obviously, that's below the statutory of 65 and that's been the case for a while. But does that continue to be a function of the fact that persistency is a little bit lower than pricing, and thus, you're continuing to also release active life reserve? Or is there something else going on there that's causing that to be below the 65% which I know is a statutory limitation?

No, it's exactly as you had identified -- it's those two issues.

Okay, so looking forward into '06, does that essentially assume kind of persistency levels at what you're currently reflecting; a little bit of improvement; a little bit of deterioration? What is that?

I think that assumes consistent persistency from '05 to '06. But you do have the fact that new premium is coming on into the book at a higher rate.

At this time, we have no further questions. I'd like to turn it back over to management for closing comments.

Well, I would like to hope that we have answered people's questions with respect to litigation. We are essentially in a situation where we cannot comment on future litigation. The reserve that we have established is based on the best judgments as of today, and that any future developments would be addressed as and when they are appropriate in consultation with our auditors, et cetera.

I would like to thank everyone for their time and attention today, and for working together to bring forward the information and the opportunity to work together going forward.

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