CNO Financial Group Inc (CNO) 2006 Q1 法說會逐字稿

Thank you for holding, and welcome to the Conseco teleconference. We will begin with an address by Lowell Short, Conseco's Senior Vice President of Investor Relations. [OPERATOR INSTRUCTIONS]

Thank you for your attention and here is Lowell Short.

Good morning or afternoon, everyone, and thank you for joining us for Conseco 's first quarter conference call. I am pleased to have several key Conseco executives on the call with me, including Bill Kirsch, Conseco's CEO, Jim Hohmann, Chief Administrative Officer, who will become Conseco's interim CEO on May 23rd, Gene Bullis, Chief Financial Officer, Mike Dubes, President of Conseco Insurance Group, Scott Perry, Chief Operating Officer of the Company's Bankers Life segment, Glenn Hilliard, Conseco's Chairman, and several other Conseco 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-Q will also be available through the investor section of our website when it is filed on Monday. But 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 yesterday's earnings release and to our latest Forms 10-K and 10-Q for additional information concerning the forward-looking statements and related factors.

And now, I will turn the call over to Bill Kirsch. Bill?

Thank you, Lowell. I would like to say how very grateful I am for having had the opportunity to lead the team of Conseco. I am proud to have contributed substantially to the Company's progress, and leading Conseco's transformation and taking the Company to the next level. Having accomplished this goal, including significant rating improvements, adding in excess of $1 billion of book value and recruiting great talent and building a deep team, including Jim Hohmann, I now look forward to taking some time to be with my family and to explore new opportunities. While it's never a good time to leave, I hope you'll understand the nature of my decision. The best thing for me and Conseco is to move the focus of this discussion to the Company today and its future. I want to wish each of my Conseco teammates all the best going forward and thank them for their tremendous dedication, commitment, and friendship during my tenure. And especially to Jim Hohmann, I offer my best wishes for the great prospects for this Company, going forward.

And with that, I'm going to sign off from the call and turn things over to Conseco's Chairman, Glenn Hilliard

Thank you, Bill. Now that Bill has signed off on the call, I want to express my sincere appreciation to Bill for the valuable leadership and direction he's provided to all of Conseco. Under his leadership, we've accomplished a great deal toward our strategic goals and objectives,. Bill brought a lot of energy and focus to Conseco, and I know I speak for all of us in the Company and for all of our investors in wishing him well. Like Bill, my plan is to have this very important call focus on the business and the quarter just ended, but before we start that discussion, I want to briefly address a few of the questions that we heard from investors, from analysts, and from the rating agencies yesterday. Most frequent questions were why the resignation, why now and what impact will the leadership change have on the rating agencies, and specifically on AM Best.

Let me take the questions in order. First, why the resignation? Bill has touched on the personal nature of his decision. He felt that having accomplished many of the goals he set for himself in taking the job as Conseco's CEO, it was important to move on with next chapter of his life. Second, why now? You know, there's really never a good time for a CEO to resign, but as a Company, we respect Bill's decision and the board accepted, reluctantly, his resignation. We announced it properly, and now we must move on. While we had planned for the release to coincide with the earnings release, the lawyers advised that we could not sit on the resignation for the whole day. At the same time, we issued a prerelease to clarify the parameters of our earnings and to make certain that everybody understood that the resignation was separate from the earnings. From a timing standpoint, this really was the best overall time. After the earnings call would have also raised questions, and may have interfered rather than helped our attempts and efforts to make sure we get ratings upgrades as quickly as possible. Bottom line, the timing of this announcement presents the Company with no meaningful roadblocks in accomplishing its objectives for the year.

This leads me to the third question from yesterday's calls of what about the impact on AM Best? Best had already indicated to us that their processes were going to follow last year's processes with Conseco. And as you remember, you know, that was into July and then led to August because of the need to look at the second quarter earnings rather than to put out anything about Conseco just before an earnings release. The timing of this announcement actually gives us the maximum time, about three months to have Jim Hohmann take a central role in the review process. I can tell you that AM Best is well acquainted with Jim and we heard, again, yesterday that Best has a great deal of respect for Jim's background and experience. In response to Bill's decision, the board has decided to launch an internal and an external search for a replacement.

We also enthusiastically and unanimously decided to appoint Jim Hohmann, our current Chief Administrative Officer as interim CEO. Jim has played an important role in developing and implementing our strategy to transform Conseco into an industry leader. He's also been responsible for Conseco's legal, actuarial, new product development, strategic planning, and business development functions, as well as information technology and our runoff business. He came to Conseco with extensive insurance experience, most recently as president as XL Life and Annuity and its affiliates, and immediately prior to that as president of the financial institutions at Zurich Kemper Life. Earlier in his career, he held various actuarial positions, including chief actuary of Zurich Kemper Life and prior to that, he was the managing principal of the Chicago Life Health Practice at Tillinghast Towers Perrin. Conseco's board sees Jim as an extraordinary leader and an insurance professional of outstanding quality. So it's my pleasure, like Bill, to put the focus on of this call now on Conseco and the quarter.

And so, I now turn the call over to Jim Hohmann. Jim?

Thank you, Glenn. As I commented in yesterday's announcement, I very much appreciate the confidence that the board has placed in me, and I welcome the challenge and opportunity of building on the progress our team has made under Bill's leadership. The first quarter was tough for Conseco, but our long-term positive outlook remains intact, and our collective drive to achieve our 2006 targets has not been diminished. In a moment Gene Bullis will walk us through the numbers in detail and describe the various factors that prevented us from meeting earnings expectations this quarter. While that is an important discussion, it is limited, in that it focuses solely on one quarter and fails to capture the many things that are going right at Conseco. Specifically, sales are up. Combined sales across all three distribution channels were up 7% for the first quarter. We have implemented the new product development process we referenced during last quarter's call to improve our selection and design of products and to increase our speed to market. As you will hear from our business leaders later in this call, we have exciting products in and emerging from the pipeline.

We continue to implement our new IT processes to enable our operations and service, through a combination of surround and connect technology. We continued our expense management, improving our productivity, rationalizing vendors, and attacking waste. We have increased our capital base through the earnings we've generated and through our successful tax strategies. We've obtained higher financial ratings, as well as positive outlooks. We were particularly heartened by yesterday's S&P action to affirm our ratings and positive outlook, following our two announcements. As discussed last quarter, we continue to implement premium rerates on Medicare supplement and long-term care. We are happy to report that these activities continue to meet or exceed our expectations. Finally, we've continued to attract high-quality talent from across the industry, as evidenced by the hiring of Dan Walseth as Conseco's General Council. In summary, this quarter's earnings miss should not overshadow the substantial progress we are making in building a more valuable franchise.

At this point, I invite Mike Dubes, the President of Conseco Insurance Group, and Scott Perry, Chief Operating Officer of Bankers Life, to briefly detail sales results in their respective distribution channels. Mike?

Thanks, Jim. Good morning, everyone, and thanks for joining us this morning. CIG continued to make good progress on its strategic initiatives in the first quarter of '06. Most notably, progress continued on our product development efforts, with three new annuity products introduced in the first quarter and several life, and supplemental health products ready to be launched in the second quarter. Our first annuity product, co-developed with Legacy Marketing Group of Petaluma, California has had rapid success, attracting 29 new IMOs and 400 agents to the RewardMark suite of products, with approximately $14 million in considerations since introduction on March 30th and we are currently approved in over 30 states. We continue work with a national partner in Florida and are making good progress in joint product development efforts in all product lines. Although we are not ready to go to market, specifications are being finalized for profit testing.

Our TSA launch was successful in February, attracting producers throughout the country. We are writing business, have received authorization from several school districts to solicit teachers, and are approved to do business in over 36 states. Currently, we have 328 new agents under contract. In our traditional IMO channel, recruiting is level with last year. We have resisted the annuity price wars but all our products are profitable. Agent proficiency is up 38% while sales are up 43%, again positive. Our life business continues with solid growth. Although our base is small, trends are positive. Applications are up 255%, premium is up 93%, and recruiting is up 17%. We enhanced our asset builder and asset builder plus and reintroduced them to the field this quarter.

Finally, we will be introducing a series of term products in the second quarter. Performance Matters Associates, or PMA, a wholly-owned subsidiary located in Dallas, Texas, with both a consumer and work site marketing division is off to a great start in new agent recruiting, with its third best quarter in history. These new recruits produced over $1.4 million in sales. Overall, sales at PMA were up in life insurance, med-sup and annuity lines. Health insurance continues to be an important line, and negotiations are still underway with two national firms to represent us both in med-sup and one in specified disease. In our traditional IMO channel, agent appointments are up 8% while new producing agents are up 143% and IMO appointments are level with -- with the second quarter. Our med-sup business is up 143% in applications and 196% premium. Our specified disease is off 24%, but we do have a series of recruiting and sales initiatives to correct this the balance of the year. In summary, our sales for the quarter were up 45%, and we continue to be excited about the opportunities in the market. We will continue emphasis on recruiting the right distribution, developing the right products, creation of additional tools, and enhancement of our distributor value proposition will generate the revenue.

Thanks again for joining us, I'll turn it back to Jim.

Thanks, Mike. Now let me ask Scott Perry to discuss at Bankers Life. Scott?

Thanks, Jim. During the first quarter, Bankers made important progress, improving business fundamentals through the successful implementation of both the long-term care rerate and the Medicare supplement pricing actions. Sales for the first quarter were in line with our forecast, down 1% versus Q5 -- Q1 of '05 due to a combination of lower long-term care sales offset by a 14% increase in all other product lines. In line with expectations, long-term care sales were down, as many of our top long-term care agents focused on servicing a significant portion of our long-term care policy holders that were impacted by the in-force rate increase. Growth in other product lines was driven by double-digit growth in the Medicare supplement line, up 21%, which benefited from the introduction of Plan J and the success of our Medicare Part D initiative. Life sales also increased by double-digits, up 15% as we continue to emphasize this product line through increased promotion, marketing support, and agent training. Fixed annuities experienced a slight increase of 4% during the quarter.

As I mentioned, the sale of PDP continued to be a focus in the first quarter. Through the end of April, we've added approximately 50,000 new members year-to-date, bringing the PDP total enrollment for the independent and career channel to 140,000 members, net of cancellations. Bankers' career agency force finished the quarter at roughly 4,100 agents, which is a small decline from the fourth quarter of 2005. This decline, however, is typical in the first quarter, as we terminate nonproductive agents. Importantly for the quarter, total productive agents, agents producing four or more applications per month, averaged 1,700 per month, which is up 6% versus Q1 of '05 and essentially equal to the fourth quarter of '05. At Colonial Penn, our direct channel, total sales for the quarter were $8.4 million, up 3% over the first quarter of 2005. We continue to invest in growing this business. We are expanding sales of our senior life insurance products throughout the year, and we will begin testing a direct-response Medicare supplement product during the third quarter of '06.

Jim?

Thanks, Scott. And now I will turn it over to our CFO, Gene Bullis for a discussion of the financial results. Gene?

Hello, everyone. As detailed in yesterday's press release, net income applicable to common stock for the first quarter was $55.1 million, with $0.35 per diluted common share. Excluding realized investment losses, net operating income was $55.8 million or $0.36 per share. These results include an increase in certain litigation reserves of $9.6 million after tax or $0.05 per share. Our book value per share at quarter end increased to $25.34, excluding accumulated other comprehensive income or loss under FAS 115. And debt-to-capital, excluding ALCI, came down another point to 15%. We have yet to receive notification of our expected final resolution of our open tax NOL issue and, accordingly, have made no adjustments in the quarter to our deferred tax valuation allowance. Our consolidated RBC ratio at quarter end was approximately 350%, compared to 358% at year-end 2005. The decrease results primarily from increases in C3 risk related to rising interest rates.

Turning to benefit ratios and insurance margins, Bankers med-sup benefit ratio was 67.8% in the first quarter compared to 70.2% in the fourth quarter and 71.6% for the full year of 2005. Results this quarter include the release of $2.2 million claim reserve redundancy. Without this claim reserve release, our benefit ratio would have been approximately 69% and in line with our expectations, as a result of pricing actions we took last year. We continue to expect this benefit ratio to approximate 70% for the remainder of 2006. We experienced higher than expected lapses in the Bankers med-sup book, which increased VOBA and DAC amortization by approximately $3 million. We believe this last experience is driven by a combination of our pricing actions and the overall activity related to the Medicare Modernization Act, both Part D and Medicare Advantage. Our Part D program results reflect a loss of $2 million in the quarter, related to the seasonal effect of loss patterns embedded in the benefit structure. Based on Q1 activity, we continue to expect full-year results of pretax earnings of approximately $4 million from the Part D program.

Bankers long-term care benefit ratio, excluding investment income, was 96.5%, compared to 96.1% in Q4 and 93.6% for all of 2005, and in line with our expectations. Based on success to date on our rerate process, we continue to expect this ratio to be approximately 95% for the full year of 2006. CIG's med-sup benefit ratio was 60.3% in the first quarter compared to 58.9% in the fourth quarter and 59.4% for the full year of 2005. We continue to expect this ratio to approximate 62% for the full year of 2006. Lapses were also higher in the CIG book, which increased VOBA and DAC amortization by $3 million in the quarter. CIG's specified disease loss ratio, excluding investment income, decreased to 77.5% compared to 79.6% in Q4 and compared to 76.2% for all of 2005. This result reflects less of an improvement than expected, considering unusual adjustments in Q4. Our expectations regarding improvements in the incidence and development of base claims proved accurate; however, higher than expected persistency resulted in lower lapse-related releases of return of premium act of life reserves than assumed. We are unable to determine if this represents a trend and, therefore, have adjusted our expectations to 74.5% for this loss-rate benefit ratio for the remainder of the year.

CIG's results also reflect the effect of unlocking certain assumptions on FAS 97 products, which reduced insurance benefits by $11.5 million in the quarter and increased amortization by $12.4 million. Our business and runoff benefit ratio was 94.8% in the first quarter compared to 99.5% in the fourth quarter and 97.5% for the full-year 2005. Current quarter results include a $14 million reduction in active life reserves, arising principally from a refinement in return of premium reserve calculations, also reflecting slightly higher quarter and in-force policy count that produced a $2 million short-fall in expected lapse-related reserve releases and an increase of $6 million based on analysis of reserve development on 2005 reported claims. Much of this claim development relates to home health care claims prior to the election deadlines for the Florida order, which leads us to conclude that this is not a trend. Based on our analysis of these results, we expect the benefit ratio for the remainder of the year to fall between 99 and 100, excluding investment income.

Net investment income for the first quarter reflects under $900,000 of prepayment activity yet earned yield held at 5.65% and new money yield was 5.76%. Based on current quarter performance and our current interest rate outlook, we are cautiously optimistic that our investment returns will exceed original expectations by up to several basis points. Investment quality remains a key driver in our portfolio. At quarter end, the portfolio was 95% investment grade. Our gross unrealized losses on below investment grade securities, a leading indicator of potential impairments, remained below $20 million.

Based on Q1 results, we remain confident we will meet or exceed our 2006 expense reduction goal of $14 million, which reflects increased stock option expenses associated with the adoption of FAS 123(R). As to our outlook for operating earnings for the remainder of 2006, we evaluated Q1 performance, including several items we believe to be nonrecurring, and have concluded that we continue to expect to meet or exceed $1.85 of operating earnings, excluding the first quarter expenses of $0.05 per share related to litigation reserves. This outlook is based, in part, on continued favorable trends in investment yield.

And with that, I'll turn it back to Jim for some concluding comments.

Thanks, Gene. After accepting my new role, I wrote to Conseco employees to emphasize that this transition does not indicate that Conseco is changing direction as a Company. I would also like investors to understand that our change in leadership should not be taken as a change in strategy. We are convinced that our strategy is sound and effective. Our vision and mission remain the same, to build Conseco into a premier insurance company, serving middle America in life, annuities, and supplemental health products. Our distribution strategy continues to focus on delivering these products through the multiple channels aligned with our business units. Our key initiatives: sales and revenue growth, operational excellence, technological excellence, expense reduction, best practices in governance and compliance, and a unified high performance culture are unchanged. The ongoing hard work, dedication, and commitment of Conseco's 4,000 associates and thousands of agents are essential to our collective success. I thank each of them in advance for the support and assistance that I know they will provide to our leadership team during this transition, and I look forward to working with them, as we continue delivering strong performance for Conseco.

And now, we will open it up for your questions. Operator?.

Thank you.[OPERATOR INSTRUCTIONS] Our first question comes from Nigel Dally with Morgan Stanley

Great, thank you. Good afternoon. First with respect to appointing a permanent CEO, do you have a time frame in mind as how long that search process will take? Three months from now will we still be waiting for news or is this likely to be a relatively short process? And second, on the amortization expense, clearly the higher lapses hit results this quarter. Do you expect that to be seasonal or are we looking at permanently higher lapse environment given the change in the Medicare environment?

Nigel, this is Glenn Hilliard. To the first question, we've just started the search process. These things typically do take a couple of months, but I will tell you the board unanimously feels we've got a great internal candidate. We, for good governance reasons, are going to do a search and we'll do it as expeditiously, you know, as possible.

With respect to the amortization, as we look at it and unpack it, the portion -- particularly at Bankers -- associated with the premium rerate would be front-end loaded to the timing of those announcements.. Relative to the competitive activity, the Part D activity is also somewhat front-end loaded, but the MA activity, obviously, would continue throughout the rest of the year. So I would say a significant portion of the excess amortization we believe is front-end loaded to Q1, but there'll be some additional impacts, based on competition. We think that on the CIG component, again, it's in part related to all of the activity around Part D, and beyond that I think that our expectations for amortization are consistent with the current experience.

Okay. And just on a different topic, just on the IRS settlement, do you have any idea on the timing? I know it's not -- the ball's not in your court, but any idea on what that will likely be settled?

It remains a guess. We can't predict the timing of how the joint committee will proceed, but we -- having said that, we expect to be able to get clarity, certainly in 2006 and hopefully by the end of the third quarter.

Okay. I'm guessing there's no change in your estimate as the likely impact that would have on your book value?

That's right.

Okay, great. Thanks.

Our next question comes from Jimmy Bhullar with JPMorgan.

I have a couple of questions. First, on just the long-term care benefits ratio and the Bankers line, that's actually fluctuated a lot in the past and I was wondering if Scott could address the outlook for that? And then I have a follow-up.

I'll ask Gene to comment specifically on the benefit ratios. Gene?

We have looked at the experience in the first quarter, and a lot of the benefit ratio was driven by what's happening with a combination of two things. One would be persistency, and that's behaving consistent with our expectations. And the other is the execution on the rerate. But the execution on the rerate is actually running slightly favorable to expectations and, therefore, we believe that will have a modest impact on benefit ratio trends for the rest of the year, but not a significant impact.

And then second, just for Glenn. I think your explanation for why the CEO change is occuring is not that good. I guess people have a reason to leave for whatever reason they want to leave, but you can't just hire a CEO every two years, pay them an executive bonus and then pay them executive severance and then say that he was only hired for two years to do a turn around and now we'll hire somebody else. I want to see if you can actually give us some more detail on what's going on and what brought about this change?

Well, again, my wish, and before Bill signed off on the call, is that Bill's wish was that we focus on this quarter, but I'll give you a quick response. Bill wasn't hired for two years. He was hired, you know, by the board with expectation that he was here for the long-term, and that certainly is -- you know was the plan at the time. And as we go forward, we also are now going to hire somebody for the long-term. And I would tell you that it was handled as well as could possibly be expected. People's ideas and aspirations and careers change, and there's nothing that you or I or anyone else can do to -- to do more than just react to that when those things come along.

And the decision was entirely Bill's to leave? It wasn't a decision by -- he wanted to leave on his own or was there a disagreement in the direction that --

There was no disagreement in the direction, there was no -- the board had unanimously expressed a wish that Bill would have stayed on. You know, Bill resigned, just as he outlined.

Okay. Thank you.

Our next question comes from Yaron Shashoua with Fox-Pitt, Kelton.

Yes, good afternoon. My first question's -- I know Bill signed off, but I want to ask this, how much involvement has Bill had on the AM Best review and the IRS negotiations?

Well, I'll speak specifically that Bill has been part of the team that has worked closely with AM Best and has been an integral part of that team. But it is a team that is -- the relationship and the communication process is quarterback'd by Lowell Short. And the rest of the team, specifically Jim Hohmann and myself, are extensively involved in all contacts with AM Best. And AM Best was on-site at Conseco for the -- for their March annual review, and that involved an opportunity to interact with the entire management team. With respect to the internal revenue service, those -- all those discussions and negotiations are complete. Bill was involved in developing the -- the strategy and the negotiation -- the negotiation aspects of coming to resolution, which we think were very successful. Now the matter is -- is in in what we believe to be a procedural state, and we're expecting to get our expected outcome forthcoming.

And you're expected -- I'm sorry, the outcome for the IRS negotiations, is that still $275 million reduction to valuation allowance by year-end '06?

Yes.

Okay, just one last question, it's on your guidance. It appears that you're reiterating your $1.85, adding back $0.05 for litigation; based on that, it would appear that you need to earn, on average, roughly $0.48 per quarter. So I was wondering where and how do you expect to improve earnings? I know you mentioned you'll exceed your investment returns, but is there something else, as well?

First of all, I would say that's consistent with our operating plan, and so that we have detailed plans for our execution. So that would not require us to outperform our existing business plans. But relative to the issues that we have identified that have essentially depressed health margins, we believe that we have the steps in place, both in terms of rerate actions and claims management, that will enable us to achieve the results that I outlined in my remarks. And then, as an overlay to that, we are optimistic that investment income will exceed our plans by up to several basis points, and we are confident we will meet or exceed our expense reduction goals.

Great. Thank you.

Our next question comes from Andrew Kligerman with UBS.

Okay. I have a few earnings-related questions, but, you know, I'm sorry to ask this, but it's very important that we understand why Bill Kirsch has left. As I broke out some of the K-type statements, I saw that, if Bill Kirsch remains, he will receive, in August, the vesting of some, at least, $6 million in securities. So my initial question is why is Bill Kirsch still going to be there in August? Number two, you know, if he is there in August, the assumption would be that, in some back-handed way, he's fired. And if he was fired, you know, maybe something was done improperly. These are the questions that are rolling all over the investment community right now and I think really need a definitive answer. So, that is my question about Bill Kirsch, and then I'll have some technical questions about the quarter.

Nothing was done improperly. Bill was not fired, and I'd rather not have to repeat that --

But we need to hear it.

Okay.

Need to hear it.

I think I said it earlier. We need for Bill and -- you know, we actually had several people yesterday suggest why wasn't there a longer transition? We need for Bill to work with us in the transition to the new -- you know, the new management team, and I see that it's perfectly appropriate to have the board consider that the right time to -- you know, to end the relationship on a full basis was the end of August. You know, we selected the annual meeting date as a time for Bill to officially give up his titles and to say farewell to the troops and his thank you for everything you've done, and to officially hand over the reins. But this is an orderly transition, and an orderly transition takes, you know, some months to make work on a successful basis. And Bill is making himself available to us for these months and, you know, you can't ask someone to do that without fairly treating them from a financial standpoint.

I guess, you know, and I hate to keep coming back at it, but -- but, you know, I just don't understand what needs to be transitioned. You know, you've got a very talented team, in my view. I think they're all on top of things. He doesn't need to be there, just fire the coach. They go and somebody else coaches and the team goes on, so what exactly does he need to do to transition?

Well, I think there are a lot of -- there're actually a lot of things that -- you know, we've got a great team in place, I do agree with you.

You do, you really do.

There are a lot of things that, certainly, he can contribute to to make this -- we thought, as a board -- look and appear and be, in fact, an orderly transition. And you know, I'm -- you know, the decision is made, the agreements have been reached, and that's the way it's going to work. And we did our best, as a board, to assure that this would be, you know, orderly to the Company and fair to the Company and, at the same time, fair to Bill for the time that we were asking him to work with us.

Okay. Enough said on that., I think if I were Bill Kirsch having quit after 21 months, I'd probably want to give a little bit back to Conseco, given the embarrassment over this situation, but that's just what I would do. Anyway, moving to the quarter, and I did think it was a solid quarter. You know, with the specified disease issue, Gene, you know you had a benefits ratio of 77% plus in the quarter. The old guidance was 72%, the new guidance is 74.5%. Gene, my question is, does that have a -- you know, a greater assumption in there for more or less lapsation and, hence, we probably could hone in on that 74.5% ratio as something that we'll see or do you think there's a chance that it could stay in the upper 70s?

Well, obviously there's always a chance. But as we look at what's contributing to the actual results for this period, we think that we've done an appropriate job of normalizing. There is a -- relative to active life reserves that get released on on return of premium experience, there is a concentration of anniversary dates and raw payments towards the front end of the year, and the extend to which the reserves that get released don't match exactly to the historical claim experience on the actual policies that we're making raw payments on, there is a mismatch that occasionally produces, either up or down. And for this quarter, it happened to be down relative to that phenomenon, and we think that, over time, those -- all those results from a return of premium point of view tend to revert to the mean. So we've analyzed that, we've taken a careful evaluation of it, and we think that, if we were to normalize the whole thing out, we would outperform the -- the restated guidance. But I think it's a -- it's a premature for us to reach that conclusion.

Good to hear. And then, Gene, one last one. You mentioned that your guidance continues to -- you know, will depend som -- I don't know what it was -- the continued favorable trend in investment yield, Gene, maybe you could flesh that out a little bit more and give us a sense of how much that more favorable investment yield might contribute to the balance of this year's earnings?

Well, obviously, we don't know any better than all of the experts on the phone and in Wall Street what's going to happen on interest rates, so we're dependent on what happens in that environment relative to our operating results because we have so much of our liabilities are FAS 60 liabilities and, therefore, improvements in yield do flow through. The -- the performance into and through the quarter indicated that we were outperforming our yield assumptions by five or six basis points, and the extent to which that continues, that's going to produce investment income and earnings in excess of our plans. We believe that that's the most likely scenario, but we also have to be cautious in that, the economy weakens and the rates change, then we will have a different set of circumstances that every other company will face.

Okay, so five to six basis points, so if things stay pretty constant from here, probably could assume your guidance is on track, just from the interest rate standpoint?

Well, no ---

Okay.

The slightly refinement of that is that, in fact, our plans do anticipate some modest upward drift in rates. So the drift has to exceed what we originally assumed in order for us to achieve additional investment income.

Okay, thanks a lot.

Our next question comes from Vanessa Wilson with Deutsche Bank.

Thank you. Let's see, where to start? I guess first of all, I did add up what seemed to me Bill Kirsch has been paid for the four months of '04, the 12 months of '05, and, now, whatever sub of '06 he's here, and it comes out to be -- before the options and restricted stock about $500,000 a month. And I guess that's plenty of money, in my view, to be on this call and to answer questions directly himself. And Glenn, I don't know why you have to be put in the position to be answering for Bill Kirsch?

Because -- good morning, first. But the idea is that we really -- you know, we think that is what it is. We've agreed to it, and the board has signed off on it, and that's where we are. And I'm happy one-on-one for people that have issues on that to spend time, but the real wish of Bill and myself is that we -- you know, we turn to the quarter and get people to, you know, to get focused on the business where it is today and where it's headed.

Okay. I hear you, and I understand your wish and I'll move on to fundamental questions. But I do think, you know, Bill is an adult, and he chose to be here for just 21 months and I think he should take the heat on this conference call right along with management because he is still being paid. With respect to the lapse rate, could you talk a little bit, Gene, about whether or not the lapse rates at this point are a surprise? And just a request, I think many of us have been asking for some time for you to put the lapse rates in the supplement, given that they're such an important driver at this point of the fundamentals. Would you consider doing that?

We will certainly consider it. The -- whether it's a surprise, I don't think that the trend is a surprise. We know that when we rerate, we get higher lapses. I think that the extent of it is always something one has to take a look at, and there is some higher amount in there than we expected, and we've tried to identify and quantify that and disclose it in this release.

Any guess or sense of what could be driving that? Is it the repricing? Is it a distribution issue? Is it --

It's a combination of repricing, the degree of competitive activity, particularly surrounding Part D, but also MA, and I don't think it's a distribution issue.

Okay. And then, Gene, on your balance sheet, I think your unrealized gain in the portfolio is now at an unrealized loss. Does that reduce your flexibility in terms of managing your portfolio?

No, I don't think so. It's -- you know, it's still pretty modest relative to the size of the portfolio, and we haven't considered the -- the unrealized loss, I think, in areas that we don't really -- we're not looking for recurrent liquidity, so I don't think it's going to reduce our flexibility.

Okay, you can hold those to maturity?

We can hold those to maturity.

Okay, and on the litigation, is there any color you can give on that and can you just confirm that's unrelated to Bill Kirsch's resignation?

It's completely unrelated to Bill Kirsch's resignation. It's no new litigation, it's specifically legacy litigation that's already been disclosed, and I would, I guess, refer you to the Q that we'll file on Monday for additional expansion of --

Okay.

-- of an update of status on litigation.

Okay. And then just on the 8-K with respect to the resignation, I was very surprised to read that you're paying Bill's legal fees for negotiating this. It's a voluntary resignation. I don't understand why he can't pay his own legal fees?

You know, I think it was just a -- to me -- a good way to get things wrapped up in a positive way, and to help Bill and, you know, as I said earlier to assure that we got his undivided attention in helping us with the transition. I don't think there's anymore to it than that.

Well, Glenn, I think you've been very gracious, and I think Bill owes you a lot for that.

Thank you.

Thank you.

Our next question comes from Joan Zief with Goldman Sachs.

Thank you. I have a few questions. The first is on the process with AM Best, and the discussion about a ratings upgrade. Could you review with us, again, in general what are some of the parameters that AM Best has been most focused on as they -- you know, as they've gone through their process?

Specifically, in this process, the primary issues, since we have already been put on positive outlook, are to assure that we're staying the course, that we are executing on all of our operating plans. They have their normal rating criteria that apply to all companies and we're no exception to that, so continued maintenance in capital as we -- again, I reported that our RBC at the end of the quarter was 350. We calculated our estimate of Best's capital adequacy ratio at 194 for the quarter, so that continues to show improvement. So, in terms of capital, metrics and operating performance, that is clear and it's consistent with our plans. The areas that they're focused in on in terms of more subjective arenas in terms of evaluation would be observing how effectively we're rebuilding independent distribution within CIG, and I believe that we have significant evidence of success and excellent execution in that area. And the other area that they focus specifically on in the review, and that we will continue to provide updates, is the execution of the Bankers in-force rerate on long-term care. And again, that's an area that we are very comfortable that we're executing well within the context of our expectations and plans, and should be able to satisfy their concerns in that area.

with a positive outlook that the AM Best has, is there any timetable that you know of where they have to actually have to make a decision, or could you keep a positive outlook for a long time?

Their published rating guidelines are 12-36 months.

Okay. Thank you. Now my other question has to do with expense reduction. Could you talk a little as to what amount of [inaudible] you were able to bring down into the first quarter, if any,? Just an explanation of how that --you know, what's generating the expense saves that's going to fall through to the bottom line for the rest of the year, and is it evenly dispersed? Is it mostly at the end? Just a little bit more color on that, please.

In the aggregate, we were favorable to our expense expectations or our operating plans by a couple million dollars in Q1. Our plans call for reductions throughout the year. We have very specific plans in place to do that. It involves focus on systems, it involves focus on procurement. We have a very extensive program underway to essentially pressurize all of our purchasing activities. And we have specific plans in place that we -- that we are confident will achieve the outcome.

All right. My last question is, we just saw the CEO resign and Gene, you are the CFO, so could you just give us some confidence that we're not going to see a similar announcement coming about the CFO?

I've committed to the board and the management team that that is the case.

Thank you.

Our next question comes from To --Tom Gallagher with Credit Suisse.

Hi. First thing I had was just a comment and then I had a few questions. First comment is, I think the general view shareholders hear is you're paying Bill Kirsch a lot of money for what's a decision that has hurt shareholders. I think if shareholders had a vote here, they would prefer to see him gone quicker. Now the question I had is for Glenn. Why do you think it is that we've had two abrupt CEO changes now without normal transitions? Is -- why the chaos here? Is this a board issue?

Good morning. I guess now good afternoon. The -- no it's not a board issue. Honestly, the board -- we've got a great board, the board is working effectively, you know, as a board and in a board role. I think, clearly, in the first instance, the board was involved making certain that the that the future of this Company and the future of the policy holders and the future of the investors in the Company was going to be moved in a very positive direction at a quicker pace than we were seeing. You know, in this instance, it is as I described it, and I think it's an unfortunate coincidence, but I don't expect it to happen again nor does the board, and, you know, that's why we're -- one of the reasons, you know, in addition to just good governance, that we're going to be not as quick this time to just move on with an answer without looking at all of the the possibilities and without working with Jim and this new role and the management team in this new role, and seeing that we're doing absolutely the best thing for the long-term.

And Glenn, just one other follow-up on that, and again, this is more of a suggestion, one person's suggestion. I think, given the fact that there's clearly fear related to shareholders here, that there's chaos here, I think maybe it would be wise for the -- when you do make the decision on the next CEO to put a clause in, if there is an abrupt change or decision for them to leave, that they won't get paid for that. The next question I had is just on the earn -- the preannounced earnings guidance yesterday. Just curious why you wouldn't have put out the earnings outlook. I think that could have eased a lot of investor fears yesterday, given the earnings miss.

That's a good suggestion. We didn't, and I'm not sure how we can, you know, rewind the process in the context of all we were accomplishing and evaluating yesterday, we thought it was important to get out a preannouncement of the results and defer any conversations about the specifics and outlook to the earnings, the specific earnings release that was coming up later in the day. The reason why we couldn't do the whole thing earlier was that we weren't completed all of our requirements, specifically our sign off from our independent accountants.

Okay, that's understandable. The -- I guess, Gene, just a question on -- maybe to get a bet more specificity between the $0.41, ex the $0.05 \charge you reported this quarter and kind of the $0.48 level, maybe if we can kind of take it piece by piece to think about filling in that $0.07 gap. I presumed some of that was baked into 1Q. I know you'd mentioned the higher investment income, but I presume some of that was already baked into 1Q, although that may not be entirely correct. Is really the bulk of this $0.07 the health margins? Or maybe you could walk me through each piece, kind of order of magnitude, what's really going to catch us up there?

It will be some improvement relative to specified disease margins that we still believe will be below plan, but will be improved from first quarter, and that's in, you know, single millions of dollars. I don't have a full reconciliation to kind of pull it off the top of my head right now. There are, obviously, many moving parts here. The component that we discussed relative to PVP is one of the elements and the fact that we expect our [inaudible] margins at Bankers to improve, even just a few basis points on that size of book is a relatively significant number. So if we were to unpack all of those, I think that -- and which we have, I think that we would see that the models produce the outcomes that we're expecting, assuming that we make -- assuming all those expectations come true.

Okay. And the reason that spec disease is going to get better or are you just assuming we're [version] to the mean or was there a little bit of reserve true-up in the quarter?

It's -- it's related to the develo -- or the release of active life reserves. Actual incurred base claims were consistent with our expectations. So it is specifically related to what we believe to be some level of seasonality in the timing of payments on return of premium, as well as the average return of premium reserves going back to what's expected.

Okay. Thanks a lot.

Our next question comes from Karen Lamark with Merrill Lynch.

Good afternoon. Couple of follow-up questions from some of the other comments. I guess, you've talked about how great the board is and that the board signed off on Bill Kirsch's pay but it seems to me the board's responsibility to shareholders, and you've destroyed quite a bit of value. So the first thing I would like to ask is how do you respond to that?

Good afternoon. The -- I don't think the board has destroyed that. As a matter of fact, I think, you know, it is a strong board that's added value since the time we came in as we emerged from bankruptcy and we continue to. I think we've created a great working relationship with management and --you know, and I think we've responded well to this. That's what you expect a board to do. But we can't --you know, we can't manage the environment and we can't manage the -- you know, the facts that we're presented with. All that we can do is step up and address them as they occur.

Are there other management changes planned?

None that -- I'll let Jim speak.

No, there are no other management changes planned.

Okay. And why should this situation with the next CEO be any different or better? If you can share your thoughts on the profile of the next CEO and how you might protect yourself from a situation like this again?

The -- you know, I'll tell you what we're looking for in the next CEO and I think maybe that will help. Obviously, we're looking for leadership, communication skills. We're really looking for some things that, you know, were essential, I believe, for assuring that this is a long-term successful appointment, and that would been an executive track record in the industry, in the insurance industry. We're looking for someone who is going to be market savvy and acquainted with the distribution. We need to have someone in this role that is really got a deep and good understanding of the financial -- you know the financials of the insurance industry, which are a little different than most other industries. And I think, you know, what we found that is people attempt to transition into the industry. If they don't have this broad, you know, management experience, if they don't have that deep insurance financial experience, things just won't work. And I would put on top of that, you know, clearly one thing we've always sought and we've sought in all of the people we brought in is integrity. It's -- we are really working to -- you know, to build this Company into a great Company, and to position it so all the investors are going to be, over the long-term, astounded and refreshed and enriched because of what we do as a board but more importantly because of what we do to bring in the right leadership and the right management to make it happen.

And, then, one last question on AM Best. Have you spoken with them since the resignation and how important is management turnover to them, aside from operations?

Yes, we have, we had a call yesterday with AM Best, actually we gave them a heads up before the announcement and then we had a further follow-up call after the announcement. As we've said, AM Best has both the individuals on our analyst team and the -- and other members of the rating committee have extensive experience with Jim Hohmann and they find that to be important relative to our rating process, and, I think that -- that in our conversations with AM Best, it will be important for us to demonstrate execution between now and when they do make a rating decision, and I think that the timing is appropriate and ideal for us to do that.

Thank you.

Our next question comes from Michael Levy with Quatro.

My questions have been basically answered. I had one question, it would be whether or not, if the supplemental executive retirement pension that Mr. Kirsch had requested had been granted, would that have changed his mind? and whether the board considered offering it upon news of his resignation?

It would not have made any difference. It's still under consideration has not been acted upon and, you know, Bill was aware that it was, being considered and was likely to be approved in some form by the compensation committee before the end of the year, but it's still not in effect.

Thank you.

Our next question comes from Felice Gelman from Sunova Capital.

Yes, this is Jed Gore from Sunova Capital. We were wondering, the board has spent $10 million each on two failed CEOs and we believe that the previous walked way with some $65 million. We were wondering why should investors give this board their endorsement? We were hoping that you can make a case for that.

Okay. Well, I'll refresh all our memories. With the first CEO, the contract that he had and the payments that he received on termination were defined by negotiations that happened during bankruptcy with the creditors committee. The board, you know, had no ability to change that or had no ability to impact it, and he was paid precisely according to the contract. You know not one penny more, not one penny less. It was a lot of money, but certainly, you know, we're not in the business of ignoring our obligations and our contractual agreements and flying in the face of what the courts have approved. So I think that has to stand on its own. And I think, you know, this board in that instance should not be judged on the amounts that were paid, but on the willingness to step in to make sure that investor interest long-term were being served by moving to the current management and leadership and getting this business moving so that actually value was being created rather than not.

In this instance, you know the board was only able to react to the situations as they come up, you know, as Bill approached us with the resignation, we had the best interest of investors in mind and certainly in the front of our minds as we were trying to make sure that this was viewed as an orderly and planned, you know, on Bill's part resignation. I think the board spent a phenomenal amount of time working through, you know, these things, trying to get to a good result for the Company and for the investors, and I think we did. I think, if you look at this, you know, the way it's constructed, it, I think, is not $10 million, it's in fact, you know, more like $6.5 million, or thereabouts, and I would, I would say that's a - on the low-end of what I've seen in the way these things have been handled in other situations.

Thank you for answering my question, I appreciate it.

Our next question comes from Jeff Bronchick with RCB Investments.

Morning. Glenn, would it be fair to say, you know, that Bill came into his job under quote quick and forced circumstances given the resignation of our prior CEO, and the fact of the matter is he's a lawyer, he's not an insurance guy and therefore probably wasn't the long-term solution to have a long-term CEO? And while timing of this is annoying, essentially that's what transpired, and the board is attempting not to do that again by looking at outside candidates as well?

Well, I'm going to let that be your statement and I'll comment on a few pieces of it. I'm a lawyer, and in a situation, probably before the time of anybody that's on this call, you know, I was taken from within an insurance company as general counsel, and put in charge. So I think, you know, I would say that at the time, you know, our view was Bill had been involved with the Company, he was serving as general counsel, he was familiar with the issues that we were really confronted with at that time, and you really need to back up and look back at the -- you know, the situation the Company was in then. We had a -- you know still a lot of major emergence kind of issues that we were, you know we were battling and he was deeply engaged in all of those.

You know, it was our thought that trying to go outside and try to do a search and leaving this open, even with other possibilities -- even myself included -- trying to on an interim basis, would have created more uncertainty than not. And as we have here, the best interest of the Company is to -- you know, to try to do the best you can to get somebody that, you know, is good, that meets our criteria of involvement and ethics, and the things we talked about before and try to keep the energy of the Company going. He came in and he's done an awful lot. I'm not going to go back through all that, but the management team is substantially rebuilt, the momentum is, you know, is now positive and good, a number of issues have been addressed and closed and I think we've transitioned as a Company. Maybe to the underlying part of your question from a point where someone who comes in like that, you know, can create energy and excitement and change the momentum of a Company into a phase where we're settling in now to run an insurance business. And I will tell you, you either love that or you don't. I happen to love it, but there are a lot of people that don't. And I think that's the mode that we're in now is outperforming the rest of the industry and delivering on these commitments and this -- you know, this value and machine we've got created here.

On that basis, the board is now -- you know, wants to explore outside alternatives for a CEO, and again, nothing personal to Jim, has the board -- has the board considered seeking strategic alternatives for the entire Company at this point in time? And if not, why not?

The board considers that the -- you know, where we're positioned with -- you know, what we've done so far and what -- you know, where the business is today, that the -- you know the best possible alternatives are to -- you know, to continue to get this Company in great shape and in a position to -- you know, to use the, you know, the substantial capital base that we're building up, you know importantly on organic growth, but in ways that, I think are going to create value faster than any other alternative. You know the board is aware of of what our alternatives are. We have looked at what our plans with this Company would produce and we are comfortable that they're going to deliver value that is better than you would get from the disruption of --

Well, given -- I mean, this is a people business, all people, and there's been two abrupt leadership changes. You're about to take, presumably -- this is going to take some time, three or four months, I would guess, to get the right candidate who's going to then take three months and meet all of the offices and get a feel for everything and then lay out his plan and et cetera, et cetera, I'm not sure why that's a quicker basis, you have a consolidating industry, you've got capital. Someone with a good balance sheet could come in and probably instantly bless the rating agencies and you get your A-rating and move it forward. I'm not quite sure why the board at this point, given what you're going through already, why wouldn't you consider just opening up the whole process and looking at strategic alternatives as far as selling the Company?

Well, your underlying assumption was that we're going to lose six months, and I the tell you that I've spent -- and other members of the board have spent now, hours with Jim and listening to his ideas and suggestions and plans for moving forward, and I will tell you it is very much an accelerated, you know, positive move in all of the right directions, so I think it's going to be a stepped up pace, increased focus, increased implementation around the things that have been put together by Bill and other management team, the management team as it existed under Bill. And so I think we importantly need to make certain that that happens, but also importantly, you know, for the continuation of the -- you know the enterprise, you need to make sure that these guys are given an opportunity to deliver on that.

So you're saying the search will not take -- I mean, I'm just say --

We're not going to wait for the search. Jim is here, Gene is here, the rest of management team are here, they're all about accelerating this thing, and, you know, the board is practiced in managing searches and we'll manage it in a way that is not disruptive to the momentum of the Company.

Just lastly I have a comment as one of your ten largest shareholders. You know, Glenn, you seem like an honorable gentleman who handles things with decorum, but I have to say it's nearly unforgivable for the board to allow Bill to stick around until August with -- I mean, come on, no other purpose what so ever than the enlightened height of his own self interest to snag the 200,000 shares that come vest in August. I think it's absolutely wrong for the board not to have put up a little, you know, stiff upper lip and stiff backbone here and say no. And if you're so confident in Jim in the interim to move things forward, then I just think, given the history of this Company and your legacy, I just can't imagine what you're thinking. Thank you very much.

Operator, we've got time for two more questions.

Yes, sir, our next question comes from Richard Glass with Morgan Stanley.

Hi. I will just echo the previous comment. As a large shareholder, the real question is who is the board accountable to because this appears like the board is accountable to no one but senior management here. And watch Bill stick around until August to collect a big fat payday when $400 million of shareholder value disappeared yesterday is absolutely disgusting to watch and absolutely unforgivable, quite honestly. And the extent that in a turn around at this Company has taken place and is in the middle of taking place, which we do think and we are glad to see, I would like to thank the employees, and I mean the rank and file employees, because the revolving door of senior management clearly could not be getting the job done here. And this is clearly just smacks of pigs at the trough, given the huge paydays that are going on here. And unless you guys have a printing press that I'm unaware with, this is purely a transfer of wealth from shareholders to senior management, and that is not who the board is accountable to. There is no free lunch here. And the board is at risk here, as well, and they're using the term good governance as you did before is just about a joke. So maybe you can answer the question of who is the board accountable to or just take it as a statement, but really, watching this is really difficult to stomach. Thank you.

Our final question comes from [Darrius Braun] with Citadel.

Everyone is sort of made clear their feelings as to the pay out package for Bill Kirsch, so I don't need to echo any comments there. But one thing I think is on everyone's mind and I'd like clearly addressed is, is there any foreknowledge that Bill Kirsch had with respect to the possibility of an AM Best upgrading that would have triggered the timing of his departure? Thank you.

No, there is nothing related to AM Best at all that is a part of this.

Jim, I'll turn it over to you for a closing statement.

Okay. Well, couple of points that I was hoping to make here at the end. So, specifically, I want to assure everyone on the call that I am both enthusiastic and confident in going forward in the role that I've been recently moved into and have accepted. A couple of observations about what I think is necessary to be successful here. I certainly echo what was mentioned earlier by Glenn in terms of leadership. If you look into my resume, you will see I have considerable executive leadership experience in my resume, I also believe that being a strategist is essential. My current job description up until yesterday is Chief Administrative Officer. I had that as a major accountability.

The Company is also into a sales and growth phase, where my insurance experience and distribution management experience will be of substantial benefit. Conseco is a very complex organization, and my actuarial experience and my financial background will allow me to understand the issues very quickly and to understand decisions and ramifications up thereof in realtime. Finally, being at Conseco for nearly a year and a half has created, for me, a fair amount of intimacy, obviously, with the business, a front line exposure to all of the employee group. Obviously I have strong relationships with our employees and, then, relationships with other important constituents, such as the rating agencies. I have personally worked with a number of the analysts at AM Best, as well as the other rating agencies, in my former employment in other insurance organizations.

In terms of what I intend to do in the very short run, I guess I'd say it comes down to two things, circulate and communicate right now. I think it's very important for me to be in front of our employee population, talking with our employee population. That began yesterday morning with a conference call; that will continue this afternoon with an officers' meeting. I need to work with, obviously, Lowell to schedule time to go out and to meet as many of you as I possibly can and to discuss with you what I see for the organization and why I am confident that we can move rapidly, as Glenn has stated. I have also talked to the rating agencies yesterday and offered to all of them that I would be very happy to meet with them individually and personally, and discuss more about where we're headed and how we're doing. And of course, the regulators, as well. So the bottom line is is that I am enthusiastic, and I am confident and I'm anxious to move forward in this role. Lowell?

Thank you for joining us today. And as always, feel free to contact investor relations for any of your needs. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.