CNO Financial Group Inc (CNO) 2006 Q4 法說會逐字稿

Thank you for holding, and welcome to the Conseco teleconference. We will begin an address by Dan Murphy, Conseco's Senior Vice President of Investor Relations. During the presentation, all teleconference participants will be in listen-only mode. A question-and-answer session will follow the presentation. [OPERATOR INSTRUCTIONS]

Thank you for your attention and here is Dan Murphy.

Good morning, and thanks for joining us on Conseco's fourth quarter earnings conference call. I'm pleased to have several key Conseco executives on the call with me today, including Jim Prieur, Conseco's CEO; Gene Bullis, Chief Financial Officer; Mike Dubes, President of Conseco Insurance Group; Scott Perry, President of Bankers Life; Greg Barstead, President of Colonial Penn Life; and John Wells, Senior Vice President of Long Term Care. During this call we will 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. During the conference call, we will be referring to a presentation that can also be obtained and viewed from the Company's website. This presentation was also filed in a Form 8-K earlier today. The 10-K will also be available through the investor section of our website when it is filed on Friday.

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 for additional information concerning the forward-looking statements and related factors. The presentation we'll be referring to today contains a number of non- GAAP measures. These measures should not be considered as substitutes for the most directly comparable GAAP measures. The appendix to the presentation contains a reconciliation of the GAAP measures with the non-GAAP measures. Also, about halfway through this conference call, we have been notified that the National Weather Service here in Indiana will perform a statewide test of the Severe Weather Communication Systems. Please disregard any tornado sirens you may hear in the background. And now, I'll turn the call over Conseco's CEO, Jim Prieur. Jim?

Thanks, Dan. Overall, Q4 was disappointing. Operating earnings from both Bankers Life and Colonial Penn were up from the prior and the year ago quarter. Results from Long Term Care Closed Block continued to be volatile with a loss of $57.3 million in Q4. Pre-tax operating earnings from Conseco Insurance Group, CIG, were $23.9 million, down significantly from both the last quarter and from the year ago quarter. It's important to note that some of the earnings shortfalls from expected results relate to what are essentially one-time items, while others are experience-related. We'll go into these items in some detail so that investors can make their own determinations.

You'll no doubt have noted that the Company said that it had a material weakness in its controls at year-end and that steps have been taken to remediate the weakness, but that the passage of time is required before assertions can confidently be made as to the effectiveness of the remediation. The reason for the determination of the material weakness relates directly to some of the unusual changes in reserves in the quarter. These include in CIG, an increase in specified disease active life reserves of of $11.7 million arising from a software error. In Bankers, there was a reduction of annuity reserves of $7.4 million. In the run-off LTC Closed Block, there were refinements of data that resulted in increases in claim reserves of $7.1 million. A complete list is shown on the slide. None of these adjustments were material, individually or in the aggregate, to our current year or prior year financial statements taken as a whole. Also in CIG, we had charges of $16.1 million related to life insurance reserves [inaudible] that were due to changes in how we plan to administer certain policies. Finally, we strengthened Long Term Care claim reserves on prior period incurred claims due to adverse experience by about $54.1 million in the LTC Closed Block and by $8.4 million at Bankers.

During December, we announced plans to consolidate the back office operations and reorganize parts of the organization. The annual run rate savings from this will be $25 million when it's completed later this year. Since that announcement, we have made numerous organization changes going down three levels of management. Among the major changes in organization, there is now a single manager of operations across the Company, Steve Stecher, and there is a single leader of the Long Term Care Business, John Wells, who you'll be hearing from later in this presentation. We also announced the plan to purchase up to $150 million of common shares and 1.24 million shares, $25 million, have been bought back to date. Slide Six is a chart showing overall new business at Conseco. These figures are new annualized premium, where single premium life insurance is weighted at 10% and annuity premium is weighted at 6%. Conseco's total collected premiums across all business lines has continued to grow, with all of the business up, other than the run-off. And with that, next up is our CFO, Gene Bullis, who will address the financial highlights of the quarter. Gene?

Thank you, and good morning. As detailed in yesterday's press release, net loss applicable to common stock in the fourth quarter was $3.7 million or a loss of $0.02 per diluted common share. This includes $9.4 million of net realized investment losses or $0.06 per diluted share, resulting in operating income per diluted share of $0.04 as compared to $0.44 in the fourth quarter of 2005. The current quarter included a number of adjustments that need to be evaluated when comparing these results to expectations and earnings trends. Adjustments arising from the detection of control issues, changes in our intent regarding the administration of certain life insurance policies and Long Term Care claim reserve strengthening, together aggregated $53 million after-tax or $0.35 per share. More detail of these items by segment will follow.

Our operating ROE excluding the second quarter 2006 litigation charge from earnings and excluding our NOL deferred tax asset from average equity and assuming conversion on preferred stock, was 6.5% for 2006 and has been declining on a trailing four quarter basis throughout 2006 principally due to the increasingly negative ROE in our run-off segment. We are presenting GAAP operating ROE by segment for the first time in this earnings call material. These segment GAAP ROE calculations start by ascribing statutory capital to lines of business based on RBC used in pricing, overlay [stack] to GAAP adjustments by segment, push down debt so that segments are levered at 25% debt-to-capital, exclude NOL deferred tax assets and segment equity, assume conversion of our preferred stock, and fully allocate corporate expenses to the segments.

Slide ten represents the EBIT table in the earnings release. I will be commenting on each operating segment on separate slides. The swing in the corporate segment is due in part to approximately $7 million of litigation costs in last year's fourth quarter, higher investment advisory fees this quarter and lower corporate expenses in the current quarter. Bankers achieved pre-tax operating earnings of $69.1 million in Q4 of '06 compared to $63.5 million in Q4 of '05. Results for the current quarter included a $7.4 million reduction in insurance reserves for certain policies no longer in force but carried in reserve valuation system. This adjustment was offset by Long Term Care claim reserve strengthening of $8.4 million, all of which relates to claims incurred in the prior quarters of 2006. Other factors contributing to Bankers' results compared to the previous quarter were improved spreads on annuities of $2.7 million and increased earnings from our Medicare Part D marketing and quota share reinsurance agreements with Coventry of $3.9 million for the quarter and $4.9 million for the full year. Bankers' 2006 operating ROE was 11.4%.

Conseco Insurance Group achieved pre-tax operating earnings of $23.9 million in the fourth quarter of '06 compared to $59.1 million in Q4 of '05. CIG's results include unusual reserve adjustments of $11.7 million in specified disease and $16.1 million in life. Other factors contributing to CIG's decrease in earnings were principally expense-related, including higher legal costs. CIG's 2006 operating ROE was 6%.

Colonial Penn achieved pre-tax operating earnings of $5.4 million in Q4 of '06 compared to $3.3 million in Q4 of '05, principally reflecting growth in the book of business, improved mortality experience and increased investment income. Colonial Penn's 2006 operating ROE was 12%. The Other Business in Run-off segment incurred a pre-tax operating loss of $57.3 million in Q4 of '06 compared to operating income of $17.9 million in Q4 of '05. Results in the current period reflect increases in Long Term Care insurance reserves of $7.1 million, related to data refinements and calculating claim reserves on policies with inflation riders, policies with two insureds, and policies subject to non-forfeiture benefits. Results also reflect claim reserve strengthening of $54.1 million resulting from adverse claim experience on claims incurred in previous periods, of which $24.5 million related to the first three quarters of 2006. Adjustments to expenses and premium accruals and higher policyholder NFO elections favorably impacted results for the quarter by $8.2 million. Normalizing for all of these factors puts the segment at an operating loss of $4 million to $5 million for the quarter. On this call, we'll be referencing to this business segment by its more familiar name, the Long Term Care Closed Block. The operating ROE on this block was negative in 2006.

Book value per share, calculated as if the preferred stock is converted, which will occur in March of -- in May of 2007, decreased slightly from the third quarter to $25.64, reflecting the net loss in the quarter and the slight increase in diluted shares outstanding. Our debt to total capital, calculated excluding accumulated other comprehensive income, was approximately 17% at year-end 2006 as compared to 16% at year-end 2005. Risk-based capital in our insurance companies remains very strong, ending 2006 at 357%. The increase from Q3 is the result of capital contributions made in Q4 and a reduction in required capital, driven primarily by favorable trends in C3 interest rate risk, due in part to the effectiveness of [ALM] initiatives. Net investment income on general account assets for the fourth quarter reflects earned yield of 5.72% and new money yield of 6.21%. Yields have improved throughout 2006 as expected, despite the low level of prepayments and the low interest rate environment.

Slide 19 shows a break-out of our fixed maturities by rates. Although we have increased our below investment grade position modestly, credit quality remains excellent. We have very low exposure to sub-prime mortgage backed securities, consisting of less than 1% of our portfolio and all highly rated, A or better. Slide 20 arrays the most recent five quarters of aggregate interest-adjusted health benefit ratios. Despite some volatility within lines, our core business ratio was quite stable. As John Wells will discuss in a few minutes, our Run-off business benefit ratio continues to be problematic. Despite the strong growth in new sales and modest growth in collected premium, our gross operating expenses are relatively flat year-over-year. During 2006, we changed course regarding our health insurance policy and administration platform, choosing to enhance our existing systems rather than install a vendor supported solution. This shifted about $10 million of costs from capital to expense, but we will avoid future depreciation. And with that, I'll turn it back to Jim Prieur.

Thanks, Gene. Now, let's hear from our business leaders, and we'll start with Mike Dubes, President of CIG. Mike?

Thanks, Jim. Good morning, everyone, and thanks for joining us on this call. In addition to the comments made by Gene regarding the performance of CIG in Q4 of 06, I would also note that our comparison with Q4 of '05 was affected by an unusual gain of $8.8 million related to the termination of a post-retirement benefit plan in the last quarter of '05. CIG's Med Supp benefit ratio was 64.1% in the fourth quarter, down from 66.8% in the third quarter and consistent with expectations. The three quarters from Q4 of '05 to Q2 of '06 benefited from relatively lower persistency, triggering a release of benefit reserves which lowered the benefit ratio in those quarters. CIG's adjusted specified disease benefit ratio was 52.5% in Q4 of '06 compared to 41.2% in Q3. Paid base claims in Q4 were the lowest we have seen since 2004. The benefit ratio rose because of reserve increases mentioned previously. Without this adjustment, the benefit ratio would have compared favorably to prior quarters.

Our Medicare Supplement first year premiums rose by 49% quarter-over-quarter and by 94% for the year. We will continue the initiatives of cross selling final expense and senior cancer products along with the sale of Medicare Supp to an extensive training effort. Our new final expense product released in December was designed to be sold at point-of-sale with Medicare Supp. Our specified first year premiums were flat quarter-over-quarter, but NAP sales and recruiting are showing encouraging momentum, especially at PMA, our wholly-owned distribution arm. At PMA, NAP sales in December were up by 34%. It was PMA's best sales month in three years. Q4 NAP sales at PMA rose by 13%. It was PMA's best quarter of the year. Total recruiting at PMA rose by 10% for the year, with a total of 469 new agents recruited. We are also starting to gain momentum in non-PMA sales of specified disease products. Such channels have grown to represent 19% of total specified disease sales, up from 14% in 2005.

Last year, we eliminated several non-performing life products by hiring a new channel leader and three field vice presidents. The focus in 2006 was strategy development, product development, and selecting a national partner. Life first year premiums were flat quarter-over-quarter, but we are seeing nice momentum in appointments, submitted applications and submitted premium, even as we continue to revitalize this line. Our annuity line shows continued strength in both qualified and non-qualified lines. Our TSA channel has shown promising momentum, with over 600 agent contracts and acceptance into many school districts. Our traditional annuity IMO channel also had a strong fourth quarter. Q4 saw another major sales contribution from our relationship with Legacy Marketing Group and from our partnership with Actuarial Development Services, which launched its first product in Q4, the Command Series.

CIG had a great year in sales in 2006, generating growth of over 36% in NAP and 17% in collected premiums versus the prior year. Recruiting was also strong, whether it was in our life, health , or annuity product lines. In 2007, our focus remains the same. Executing our work site strategy. Our new team has over 60 years of sales and recruiting experience in the work site business, and have done a remarkable job in attracting producers to the Company in a short time period. We will continue to work diligently on building our life insurance strategy with a new value proposition, technology, ease of doing business and products. We will be going to market in Q3 of '07 with new products, and are in discussions with several national partners.

2006 generated success with our national partners. We will continue to build out products for those firms, which I believe will lead to an increased share of their business. We will also be looking for expanded opportunities in health and life products. Our product development process is an important aspect for our Company. We continue to develop products that produce value for our producers and customers, while also generating acceptable returns. Our efforts in '06 produced ten new products, and we anticipate 11 more in '07. PMA is a unique organization with strong leadership and strong sales potential in both its consumer and work site marketing divisions. We can continue to capitalize on our suite of products that will continue to grow this organization, and they have a sales growth target of 19% in 2007. And lastly, our health insurance expertise throughout Conseco is a valuable asset. We have a strong in-house team with a wide array of products that enables us to recruit capable producers. We are continuing capitalizing on these relationships to enhance productivity through cross-selling, and early training sessions have proved extremely successful. Jim?

Thanks, Mike. Now I'd like to ask Scott Perry to discuss the results at Bankers Life. Scott?

Thanks, Jim. Overall results for the quarter and year were solid. We continue to focus on improving business fundamentals, product margins, sales growth, and expanding the value proposition to our customers and agents. Bankers continued its strong performance with pre-tax operating income coming in at $69.1 million. This performance reflects many of the actions we implemented in late 2005 and early 2006 to improve the fundamentals of our in-force block. The improved earnings are primarily driven by a lower Medicare Supplement benefit ratio, higher investment income driven principally by higher yield on assets backing our annuity and Long Term Care blocks of business, and lower operating expenses. Revenues for the quarter continue to show steady growth, up 12% from the prior year period. For the year, revenues were also up 12%, reflecting gains from the increases on in-force health blocks and the addition of the PDP product line. We have experienced a steady decline in the Bankers Medicare Supplement benefit ratio, both on a current quarter and trailing four quarter basis. This has been fueling a lot of our steady earnings improvement and is being driven by the pricing actions we took for 2006, and by continued favorable claim experience resulting in redundancies, which positively impacted our 2006 benefit ratio.

We experienced an increase on our interest-adjusted Long Term Care benefit ratio in the fourth quarter. This was primarily driven by an increase in the number of initial claims, higher persistency and a reserve deficiency recognized in the quarter. On the re-rate fund, we continue to be pleased with the progress begun in late 2005. We have received approvals of 81% of the requested dollar value of the rate increases, exceeding our initial goal of 80%. Of these approvals, we have now completed systems implementation on 75% of the affected policies. The remaining policyholders will be implemented during 2007 as they reach their next premium due date. Additionally, we have begun filing follow-up increases in states that did not approve the full amount the first time. Although this did not impact our fourth quarter results, this will be additive to the already better than expected re-rate results.

Moving on to premium. Regarding Medicare Supplement, first year premium collections rose by 23% for the quarter and 32% for the year. Also noted on this page is the premium generated through our PDP quota share reinsurance arrangement with Coventry Health Care, which have generated over 140,000 customers. As Gene noted, this block contributed $4.9 million in earnings in 2006. This will grow to $6 million to $7 million in future years, as all acquisition fees were absorbed in year one. In addition to what I will report by product line, this past October, we announced the expansion of our strategic alliance with Coventry Health Care to include Medicare Advantage private fee-for-service plans. Similar to our arrangement governing the stand alone prescription drug plan, we have entered into a quota share reinsurance arrangement related to sales of those plans which commenced this past November.

So, while we experienced modest sales improvement in the fourth quarter, take note that these results do not include the sale of our private fee-for-service plans, which were 14,000 at the end of December. This will be reported as Q1 '07 new premium. About 15% of those sales were exchanges from our current Med Supp in-force, allowing us to maintain those customers who might otherwise have been lost to competitor plans. In addition, our entry into PDP and MA has created additional ways in which our agents can acquire a new household, which boosts our ability to cross sell products, an activity that continues to work well for us. While we are very optimistic about our entry into this business, like others in the Med Supp industry, we are likely to experience earnings volatility due to the impact of lapses on DAC amortization.

As we have discussed in prior quarters, our Long Term Care sales have steadily been declining over the past five quarters. With increased emphasis on life and the introduction of PDP and PFFS products, we have purposefully diversified our product mix. We expect Long Term Care sales to slightly improve from these levels in the coming quarters. Our current products are priced at levels and incorporate low lapsation and interest rate assumptions.

Life sales continue to grow at Bankers. Although first year premium collections were down from the previous quarter and essentially flat to last year's fourth quarter, first year premiums for the year were up 22%. All life product lines are growing nicely. And finally annuities. First year premium collections of annuities were down 11% from the prior quarter and down 6% from the fourth quarter 2005, reflecting continued pressure on long term interest rates, which has affected the competitiveness of annuities versus CDs, and by our agents' focus on MA open enrollment. For the year, however, first year annuity premiums rose by 5%, consistent with with our expectations.

In summary, the bank, the Bankers channel continued a steady and improving performance, shoring up business fundamentals and growing the business. Med Supp benefit ratio improvements and continued progress on the Long Term Care re-rate implementation have contributed to improved earnings performance. We continue to grow the business as evidenced by modest growth in the quarter, but strong growth year-over-year of 13%. With this past year's success with PDP sales, followed by strong sales of Medicare Advantage plans, we have demonstrated our ability to successfully -- be successful with a broad range of products, regardless of whether we manufacture them or partner with other providers to bring them to market. These successes pave the way for our plan to position ourselves as a source of security for both health and financial products for the coming generation of middle market retirees. Jim?

Thanks, Scott. As indicated in our press release, we're now reporting Colonial Penn as a separate segment rather than as part of Bankers. We set some aggressive growth goals for Colonial Penn, and now I'd like to ask Greg Barstead to discuss the results at Colonial Penn. Greg?

Thank you, Jim. Colonial Penn continues to experience solid growth in its core life insurance business. As Jim has stated previously, our goal is to accelerate Colonial Penn's annual organic sales growth to over 20%. With regard to earnings activity, Gene addressed this earlier, but to recap, on a trailing four quarters basis, we see year-over-year earnings growth of 8% over the full year 2005, 17% growth when comparing the fourth quarter of '06 against the third quarter of '06, and 64% growth when comparing the fourth quarter of '06 against the fourth quarter of 2005. As we examine our sales results, I would like to point out that Colonial Penn's first year collected premium has increased for the eighth consecutive quarter, and that both NAP and first year collected premium increased on a full year basis; NAP by 10% and first year collected by 18%.

This growth is driven by four factors. First, over the past several quarters we have increased our advertising expenditures in our core media-based lead generation campaigns. We will continue to seek opportunities to expand this strategy within our marketing allowables in 2007. Additionally in 2006, we refreshed several of our commercials and are experiencing improved response rates in sales productivity from these new ads. Second, we have scalable -- we have a scalable direct mail-based lead generation program that complements this media-based approach and that provides additional marketing breadth. Direct mail attracts a somewhat different buyer profile. It can be scheduled to offset the seasonal lead volatility inherent in our media-based advertising strategies and compared to media-based approaches, generates lead cost efficiencies at the margin. In 2007, we expect approximately 20% of the newly identified prospects to come from these direct mail programs.

Third, we maximized the sales yield arising from lead programs through recurring campaigns directed at the responders to those programs. We maximized the sales yield arising from the existing customer relationships with offers of additional coverage. While most of this follow-on activity is direct mail-based, there's an important element that involves selling through selected Bankers field agents who are cross appointed with Colonial Penn. The follow-on sales in the responder-based programs benefit from the increased lead activity. The follow-on sales in the customer facing programs benefit from the emerging larger pool of customers. As lead volumes continue to increase as the installed base of customers continues to grow, we expect the sales results from these follow-on programs to increase accordingly. And finally, interwoven through all of these various marketing approaches is a robust telemarketing effort that constantly challenges itself to increase its overall productivity, while at the same time delivering outstanding customer service.

In summary, success requires the focus on the fundamentals of the business and pushing on the levers that drive the business forward every day. Whether it is about achieving higher marketing productivity through improved lead optimization practices, or increasing customer retention rates by providing a quality customer service experience, or adopting strategies to maximize revenue per contact, or maintaining rigorous expense discipline, there are two common threads. One is focus, the other is execution. And now I'll turn it back to Jim.

Thanks, Greg. I'd like John Wells, Senior VP of Long Term Care, to give you a progress report on our Closed Block LTC business. Although John has been one of our key operations leaders since 2004, this will be his first report to investors since he assumed responsibility for the LTC Closed Block in mid- December. John?

Thanks, Jim. In last quarter's call we outlined our program for improvement to address the benefit ratios over time in the LTC Closed Block. Since last quarter, we have made progress on these initiatives, the results of which we will share with you in a moment. As Gene mentioned earlier, results for the quarter are disappointing. However, they do reflect one-time adjustments and are not indicative of our expected future performance of the block. The interest rate, interest-adjusted benefit ratios for Q4 2005 and Q1 2006 were relatively flat, at less than 50%. However, the past three quarters have risen steadily to 143%. We also experienced higher than historical persistency on this block in 2006.

Last quarter, we outlined several initiatives, including premium re-rates, claims management, technology, and talent and organizational design. We have made significant progress toward our goal of an estimated $35 million in net revenue enhancement from this first round of rate increases. These metrics reflect activity through March 1st, 2007. We have submitted filings to the states for their approval totaling $39 million, representing 71% of our goal for this round of filings. We have received approvals from the states totaling $19 million. This represents 46% of our goal that we ultimately expect to receive in approvals. We have implemented approved rate increases representing $13 million of revenue enhancement, or 38% of our total goal of $35 million. Such rate increases will take effect at the next premium billing date of the related policies. We expect to complete our filings for this round of rate increases in May of this year, with most of the net revenue enhancements coming on a run rate basis by the end of the first quarter 2008.

Slide 46 indicates in concept the length of time it takes for a rate increase to impact premium revenue, and relates that time to some of the steps in the process. The length of time from inception of the rate action to complete reflection in revenue is about two years. The premium re-rate activity is one of our top priorities, and we will continue to manage the progress closely. The financial effect of these rate increases will occur throughout 2007 and into 2008. We're beginning to see the positive effects of changes in our protocols for administering claims. We have engaged two leading LTC administration companies to conduct studies of our claims practices and are in the process of implementing many improvements. These practice improvements will help us more accurately adjudicate claims in accordance with contract provisions. We expect that these improvements will reduce our claim leakage by more than $10 million per quarter by the end of 2007.

In the fourth quarter, we implemented a new work flow system which will help us better manage our claims. We're also making progress in another important technology initiative, which is an improved integrated policy benefit repository and accumulator tool. The tool will enhance electronic access to policy benefit and payment history, which will drive more accurate efficient claim adjudication and reduce leakage. We're also in the process of selecting a claim processing system that together with the changes in claim protocols, will better enable us to pay claims more accurately and reduce claim leakage.

Organizationally, we have extended the specializations of our claims teams to include alignment by type of claim and type of process, in addition to geography. This will drive improvements in claims management, compliance and customer satisfaction. We have also established better linkages between the training and audit staffs with the claims processing function, which has led to both efficiency and quality improvements in adjudicating claims. On the compliance front, we are launching two panels. One to review claims denials in complex cases, the other to review appeals as part of our ongoing efforts to insure appropriate and compliant claim decisions. As noted during the call last quarter, it is important to realize that while these actions will drive improved performance in the Run-off LTC book, it will take time to materialize. We remain focused on managing the changes noted above, and we expect accelerating process and financial improvement as we progress throughout 2007.

In summary, LTC Closed Block financial results for the quarter were disappointing. But since last quarter, we have made meaningful progress on our plan for improvement which addresses our business fundamentals and will lead to improved loss ratios. We have made significant advances in our $35 million re-rate program, improved our claims management practices, enhanced our system tools, and continue to retain industry experts to assist us with further improvements. Jim?

Thank you, John. Overall, I think it would be fair to characterize Q4 2006 as a messy quarter. There were a lot of one-time items, some of those arising from the implementation of new systems, because as you imagine, when you put in a new admin system or you move a block to a new valuation system, that's the time that you are most likely to encounter either errors or refinements in the calculation of reserves. Some of the items, principally in LTC Run-off, represent a catch up in experience. We have not provided guidance since Q2 2006 because of the volatility of the Long Term Care Closed Block book. That volatility is likely to be with us still for a few more quarters as we fix our claims management in that business.

Having said that, I'd like to reiterate some of the steps that we've talked about today and that we're taking to improve earnings. First, in the LTC Closed Block, we have talked about improvements in claims management that would reduce claims leakage by more than $10 million per quarter pre-tax. Second, in the LTC Closed Block, we have shown how re-rates are coming through that will produce $35 million of additional annual revenue by Q1 of '08. And third, through the reorganization of the back office, we're confident that we will reach $25 million in annual savings through that work. The combination of these three actions alone total $100 million of annual pre-tax improvement in earnings, so these are very significant. They will be impacting earnings by year-end, and you'll be able to see them.

In terms of growth, 2007 should be a very good year. In 2006, the Company's collected premium grew significantly for the first time since emergence from bankruptcy. As Scott Perry pointed out in his presentation, the power of the Bankers field force was shown by the strong launch of the Coventry PFFS product, 14,000 new customers by year-end and many more since then. That of course, is in addition to the more than 140,000 customers picked up when the prescription drug plan was launched last year. Based on results so far, Bankers is going to have a good sales year. At Colonial Penn, 2006 started out slowly but it was picking up momentum as the year went along, and this will be a solid year of sales growth for them, as well. At CIG, the business depends upon building new relationships. And as Mike Dubes has pointed out, they will continue to focus on execution and building new relationships which will help them achieve aggressive sales growth targets.

Within the Company, we've been talking about the need to fix, to focus, and to grow. Much of what you saw in Q4 was around the fix; getting the numbers right, continuing to implement new systems, cutting unnecessary costs. Getting the business focused has mostly been associated with the reorganization; appointing one leader for operations, Steve Stecher, and one leader for Long Term Care, John Wells. And of course, growth is always important for a Company like this, and I've spoken to the growth already. The Company's performance recently has not been good, but we are taking the necessary steps to improve. The impact will be tangible, and it will be easy for you to see. And now, we will open it up to questions. Operator?

[OPERATOR INSTRUCTIONS] Jukka Lipponen, KBW.

My first question is with respect to the Bankers Life Long Term Care block. Why should we feel confident that the trend will turn around, because the loss ratio continues to trend higher, even despite of the increased pricing on new business, and also the rate increases that you've already put through on some of the in-force business?

Jukka, that's a very good question. I think that in our view and outlook, if we take the reserve strengthening that occurred in the fourth quarter, as we said, that does relate to our experience pushback throughout 2006. So that would mean that based on our experience entering into the year, we're running $2 million to $3 million a quarter adverse to that in our benefit ratio. That is true, as the benefit ratio, as you know, on an interest-adjusted basis, includes the impact of the rate increases that were assumed in our fresh start accounting, so that you wouldn't have seen a significant impact from that any way. But we are experiencing modestly higher level of claim in the Bankers block, as well.

This is John Wells. One other comment about that is that we continue to write -- we're writing new business now on our new product, which is at the margin for new business. And we have in addition, changed some of our underwriting standards to be consistent with some of the industry best practices. So the new business is profitable and underwritten appropriately.

So when should we expect that loss ratio to start to either stabilize or ideally, obviously, turn down?

Well, we would hope it would stabilize at the higher level right now. But the industry as a whole, has been suffering from worsening experience in LTC, as you know.

And my second question is do you have the -- or can you provide us the capital numbers by the segment that you're using for the ROE calculations?

There are exhibits at the end of the presentation that have that information.

Oh, okay. I'm sorry, I missed that. And then my last question is, Jim, where are you at with your hire of the new Chief Financial Officer?

Thank you for the question. We're getting close. We are very close to being able to announce somebody. And as Gene approaches his long ago announced date of retirement, we'll have a name that we'll share with you all.

And fair to expect that the person has a fair amount of experience in the industry?

Yes, right. Of course.

Thank you.

Mark Finkelstein, Cochran Caronia Waller.

On the third quarter call you indicated that the annualized rate increases were expected to to be $50 million. I think $35 million in year one. I'm just curious, with the claim experience shown in the fourth quarter, are you planning on increasing in subsequent periods the total expected impact on premium from the rate increases?

This is John Wells. We plan -- this is round one of our rate increases, of which we expect to get $35 million net revenue enhancement. And we expect to, on an ongoing basis, file several rounds of rate increases. So this is just the first round. And we'll start the second round filings in the spring, and we that expect that to be a recurring, filing and approvals over time. So we expect this to be a multi-year process.

Okay. And then just thinking about the margin and the business, I mean, what are your views? Are there any risks of a FAS 60 unlocking scenario?

Well, clearly, we have this experience to indicate we have less margin than we view that we had at the beginning of the year. But we still have margin in the book, so that I think that at our existing level of experience, we don't see that as a risk. If it continues to deteriorate, there obviously is a point where it would cross over, and that would be an issue.

Okay. And I just wanted to make sure that I understood the comment on the $10 million leakage that you're experiencing in the quarter. I believe, and correct me if I'm wrong, but your total paid claims I think is trending in the $100 million range per quarter? So this suggests that 10% of your paid claims are kind of leakage per se. I guess, can you just elaborate on what you're seeing and how quickly those remediation efforts can be put into place?

Sure. First of all, the $10 million was not really reflected in Q4 this year. We expect through some of the claims adjudication changes we're making that that will occur over time throughout this year, with a run rate being about $10 million favorable for claims leakage by the end of '07. And some of the things we're doing around that, are we are looking at our processes with outside experts. We're managing care instead of -- right now we're managing our care on about 20% of our business, we're going to extend that to 100% of our business. And we're just changing our internal focus on our claims adjudication process, which we believe will impact claims payments, initials, and ongoing claims by about $10 million a quarter.

But you were right, Mark. It's a little bit less than $100 million of claims being paid per quarter and we're talking about $10 million on the $100 million.

Okay. And then I guess just finally, does the fourth quarter results in any way impact the pace of the buyback that you're planning, I think the $150 million?

It shouldn't, no.

Okay, that's what I have. Thank you.

[OPERATOR INSTRUCTIONS] Tom Van Buskirk, McMahan Securities.

I had just a couple of questions. First would be, can you give us a feel for liquidity and general financial strength at the holding Company? And then I guess the second one is within the Run-off book. If you said this, I apologize. But do you have a sense of whether we've seen the last of the reserves strengthenings, or where you would expect that to go from here?

Liquidity, we're in strong shape. We continue to maintain effective liquidity at the holding Company. We've got approximately $75 million, that varies a little bit from time to time. We also have an $80 million revolver. So we have -- and we have a capital plan that we think maintains adequate liquidity for as long as we have a plan, which is for several years. Second question related -- .

Second question was the Run-off book. And I mean, the Run-off book, what we set aside is what we think is the appropriate amount to set aside in any quarter. So I think that's the answer.

Okay. It obviously, just from trending it, it kind of looks like it's snowballing. And I guess the question is, is this really it? And I guess what you're answering is you think that now you're essentially there in terms of adverse development.

The accounting would require that we reflect what we think the claim experience on existing claims is. The net present value of all of those claims have to be recorded. So we think that given the way that we're required to account for the book, that it is at its current level. If there is future deterioration of claims incidents and severity further increases, then that will impact the results of the book.

Do you have outside actuarial firms go over those reserves? And if so, how often?

Yes, and quarterly.

Yes, and quarterly. Okay. Do you say who the firms are?

Not without their permission.

Okay. And then just one other quick one. Given the developments of the quarter, do you see, or has there been any additional discussion with the rating agencies? Do you think that this changes the timetable that I guess Best had put you on for an upgrade?

We will be entering our annual review cycle in a couple of months, or actually about six weeks. And that will certainly be a subject of our discussion with all of our rating agencies. But we haven't had detailed discussions around the current quarter yet.

Okay. Thank you very much.

Jukka Lipponen, KBW.

A couple of them actually. Can you quantify, Jim, I think you had in the past talked about there are some blocks in CIG, that all blocks of business that had like low single-digit ROEs. How much capital is backing those blocks?

Well, we've got, in the back of the presentation, there's the capital in the whole segment. And so that would give you some idea of how much capital is in CIG.

Are there any even some kind of range? Are we talking about maybe 5% of the segment capital being in those kinds of blocks? Or is it more than that?

Well, it's one of the reasons why the CIG ROE is so low. Although the other reason, of course, was the specified disease and the life reserve change that was made during the quarter.

Okay. And Gene, can you go over that again? You mentioned something about a $10 million expense shift from -- a shift -- a cost shift from capital to expense.

Well, in CIG -- well actually across the enterprise, but commencing with CIG, we have had initiatives to improve our health platforms. And we started the year with an expectation that we were going to be installing over a three year period a vendor supply platform. And we determined midway through the year that that strategy was going to prove to be more expensive than we had expected and take longer and not produce the results that we had anticipated. So we shifted our strategy during the year. And the outcome of that is that when you enhance an existing system as opposed to install a vendor supplied new system, you shift your accounting for that from essentially capitalizing the cost to expensing it as incurred. And that, relative to our plan, that shifted about $10 million of expense.

And so -- ?

Plus, we won't have depreciation on that because we expensed it as we've gone along.

Right. But that expense then will continue?

Well, that expense has built value and the extent to which we continue to improve our operating platform, we will continue to incur. So the program isn't done, if that's what you mean. We still have significant more work to do in our health platforms, and that will continue for several years.

Yes, I guess what I'm getting at is so the run rate of expenses, like the current quarter in CIG, is -- should we think of that as sort of the current run rate of expenses?

Yes, with the -- consider also the fact that we've got our project to take $25 million out of the run rate, and that will certainly include system spending.

Right.

In that population.

And then lastly, the additional re-rates, am I correct in recalling that it's primarily Florida and California who did not give you the full amounts in the first go around?

At Bankers?

Yes, at Bankers.

Yes, actually, Jukka, Bankers -- those were two states. But there are others where we had partial, about 15 others where we received partial approval of the target amount. And we'll be going back to all of those states.

Okay, thank you.

Joan Zief, Goldman Sachs.

It's actually Andrew Brill here in place of Joan. Just had a few questions. Just the first question, how do you guys get comfortable that you priced new products appropriately, given all of the system challenges and valuation errors you've had? And I have a few just quick follow-up questions.

Well, in terms of new product, for the most part, the margins are attractive. And obviously, where the real issues have arisen have been with the old Long Term Care Run-off block. And we look at the margins very carefully on the new business. Management is very much incented by their ability to hit those margins today, and so we're keenly aware of what the margins are.

Yes, and maybe I should rephrase that question. I guess our concern is, given some of the challenges you've had, and I'll cite let's say the specified disease reserve increase specifically, with the correction of reserve valuation errors and the Med Supp reduction insurance reserves, because they were incorrectly carried, and the reserve valuation system. I mean, does that at all give you concern or should that give us concern that the systems might not be in place to adequately price new products? Or should we be thinking of those as two completely unrelated issues?

Well, I don't think they are unrelated. And of course, those two things are what give rise to the material weakness conclusion. They are two of a few of the things that do give rise to that. And the specified disease mistake was a mistake made quite some time ago, and it wasn't calculating some of the riders that were on the policies. And the SDIA, these are all old mistakes that we're catching up to today. And as we make the effort to put in new admin systems and become more efficient and we move valuation on to new systems, that's when you discover these things. And so we are cleaning up the business. And as we clean it up, we're tripping over these things. There are fewer and fewer new admin systems to put in, so it becomes increasingly less likely that legacy problems are there.

Thanks. And just in terms of the buybacks, would you expect that to be completely completed in 2007?

Well, we have the -- we've said that's what our current plan is. And we have approval to do up to $150 million, and I think I'll just leave it at there.

Okay. And what have the rating agencies communicated to you with regards to their comfort around your capital initiatives? Have they put at some sort of threshold with where they'd feel you comfortable maxing out at? Or have they really not done much to you at this point?

Well, it hasn't been that explicit. Certainly, they're interested our plans, and we'll review them. And we have appropriate discussions and understand what their positions are. But it's not like we have specific hard metrics on any of this. It's an overall balanced discussion that takes into account all of the factors.

Okay, thank you very much.

David Merkle, [Hold] Capital.

Could I get a little more detail on the life reserve and VOBA changes at CIG?

We have many policies that have opportunities or requirements to adjust for things like [inaudible] insurance or credited rates. We take a look at periodically, and we discovered a couple of small books that had a disconnect between the actuarial assumptions used in calculating, such as the FAS 97 reserves and what our intents are relative to administering those books, and we made revisions and that resulted in some adjustments.

Okay. Were those interest rate-related, mortality-related, morbidity-related?

They were principally morbidity, mortality and expense load-related.

Okay. Mortality -- . Last question. How many more administrative systems are you going to be changing, and what do you expect, at least in broad terms? I know it will improve the administration of the business. And obviously, from my own time when I worked at AIG, whenever we went through a system conversion, you found far more trash than you would ever anticipate. Do you have -- ?

Sure. In terms of numbers of systems, I think a number somewhere around ten might be about right. But some of those are small systems and therefore, not particularly significant.

Okay. Very good, sir.

Okay. Operator, we have time for about one more question, please?

Yes, sir. Mark Finkelstein, Cochran Caronia Waller.

Just a couple follow-ups, please. Scott mentioned his lapse expectations for Q1 in Med Supp at Bankers. I'm curious what you are seeing at CIG, which is arguably a more vulnerable channel to private fee-for-service.

I don't think we'd want to comment specifically on results for shorter than a quarter, except to say that the trends aren't significantly different from what we've experienced historically for Q1, particularly given all of the activity last year in PDP activity, and we'll leave it at that.

Okay. And then just to clarify, the 14,000 private fee-for-service [line], was that as at December 31st? Or is that a year-to-date enrollment number?

Mark, this is Scott. That was through December 31st. And obviously, we've continued to sell.

And the other thing to note about that is that those sales are not booked until Q1.

Right.

So a lot of the activity in Bankers, Bankers agents, would have been spent devoted to that kind of sale in Q4, but the results will be seen in Q1.

Okay. And then I guess just finally, are there any material costs associated with some of the remediation of the control weaknesses? Or is it more process oriented?

It's principally process oriented. There aren't any one-time incremental costs, except overtime.

Okay. Thank you.

There are no further questions at this time.

Thank you, operator. Conseco is -- remains focused on the senior middle market in America, and this is the fastest growing major segment in the marketplace. We have a unique sales machine. It's dedicated to this market, whether it's through agents, direct, or through brokers. And we're committed to growing this business successfully into the future. Thank you very much.

This concludes today's conference call. You may disconnect at this time.