CNO Financial Group Inc (CNO) 2007 Q1 法說會逐字稿

Good morning. My name is Lashay, and I will be your conference operator today. At this time, I would like to welcome everyone to the Conseco, Inc. 2007 first quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a Question and Answer Session. (OPERATOR INSTRUCTIONS) Thank you.

Mr. Murphy, you may begin your conference.

Good morning, and thanks for joining us on Conseco's first quarter earnings conference call. I am pleased to have several key Conseco executives on the call with the presentation today including Jim Prieur, Conseco's Chief Executive Officer; Gene Bullis, Chief Financial Officer; and John Wells, Senior Vice President Long Term Care. Also joining us for our question and answer session will be Mike Dubes, President of Conseco Insurance Group; Scott Perry, President of Bankers Life; Greg Barstead, President of Colonial Penn Life; Mark Alberts, Executive Vice President and Chief Actuary; and Ed Bonach who will become CFO tomorrow.

During the 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. 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-Q will also be available through the investor section of our website when it is filed later today. 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 from 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 to which we will be referring 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, and now I will turn the call over to Conseco's CEO, Jim Prieur. Jim?

Thanks, Dan. The first quarter of 2007 produced some real progress in the core business and improvements in the underlying economics of the run off Long Term Care business. The P&L for the quarter showed little positive impact from these improvements, and as we said before, it will take a few quarters for the impact of the improvement of LTC to make their way through the bottom line. Bankers Life had a record sales quarter, more than $102 million of new business annualized premium, driven in part by successful campaign to sell private fee for service business manufactured by Coventry. Similarly, Colonial Penn had a strong increase in sales, 24% over the same period in 2006, and its lead generation activity during the first quarter showed an even stronger increase, which of course is a good indicator of future sales growth. CIG, Conseco Insurance Group, had a slight decrease in sales, but there was a shift in its product mix which was beneficial. With the Other Business and Run-off segment, usually known as the run-off LTC block, there was progress in both the rerates where we now achieved our planned goal for rerates submitted to regulators, and with the management of claims where we're making significant progress in improving claims management. Both of these efforts have had minimal impact on reported earnings to date even though inevitably they will have a significant impact. We also announced yesterday that we reached an agreement to sell a $3 billion block of old fixed and equity indexed annuities. This deal is subject to regulatory approval, of course, but should be completed in the second half of this year. This will free up about $250 million of capital. The Board has increased the amount of share buyback program increasing it from $150 million to $350 million.

During the quarter, earnings from the core businesses were down principally due to much higher than anticipated mortality in the CIG block and due to higher than expected lapses in the Med Supp business at Bankers. There were some other mostly offsetting items in the quarter as well, which we'll be discussing later. We believe the jump in mortality at CIG is a random event. The higher lapses at Bankers in Med Supp are due to the market success of Med Advantage products or PFFS products in the marketplace, and this should be seasonal because most Med Advantage products have a selling season that ends in Q1. We do actually make more money on private fee for service than on Med Supp, but the timing of the income is different. Med Supp selling expenses are DACed while PFFS sales expense is written off in the year of issue. There was additional reserve strengthening of $22 million in one of the parts of the LTC run-off business which will be described in greater detail later in this presentation.

The growth in new business of 10% from the same period one year ago was driven by the growth in Bankers new business. During the first quarter, Bankers increased its sales of PDP and PFFS from $32.8 million in the first quarter of 2006 to $51.1 million in the first quarter of 2007, an increase of over 50%. As I mentioned before, Colonial Penn also recorded sales increase of 24%. Slide 6 shows the steady increase in total collected premium. If you take the seasonality out of it, the four quarters moving premium is shown growing more than 13%. 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 of our preferred stock, was 6.5% for 2006, and has been declining on a trailing four-quarter basis principally due to the negative ROE in our run-off segment. As a reminder, these segment gap ROE calculations start by ascribing statutory capital to each line of business based on RBC used in pricing and then overlays STAT to GAAP adjustments by segment. We push down debt so that segments are levered at 25% debt to capital. We exclude NOL deferred tax assets in segment equity, assume conversion of the preferred stock, and fully allocate corporate expenses to the segments. The Company has set a long-term goal of improving its operating ROE to 11% for the year 2009, and I will be discussing that a little bit later. Next up is our CFO Gene Bullis, who will be taking us through the financials. Gene?

Thanks, Jim, and good morning. Starting at the parent company level, slide 8 replicates the EBIT table in the earnings release. I will be commenting on each operating segment on separate slides. As detailed in yesterday's press release, net income applicable to common stock for the first quarter was just over break even at $900,000. This included $13.7 million of net realized investment losses or $0.09 per diluted share resulting in operating income for diluted share of $0.10 as compared to $0.36 in the first quarter of 2006. The current quarter included a number of adjustments and needs to be evaluated in comparing these results to expectations and earnings trends. Additional adjustments arising from the detection of control issues, higher mortality costs in the CIG Life book, significantly higher Med Supp lapses at Bankers, changes in assumptions for future launch and care rerates at Bankers, closed block Long Term Care claim reserve strengthening, and increases to litigation reserves together aggregated about $33 million after tax or an impact of about $0.20 per share. More detail of these items by segment will follow.

Next we are going to be focusing on our run-off Long Term Care block. The Other Business and Run-off segment incurred a pre-tax operating loss of $30.9 million in Q1 '07 compared to operating income of $24 million in Q1 '06, and a loss of $57.3 million last quarter. Last year's results include several reserve adjustments that increased pre-tax earnings by $14 million. Q1 results were adversely affected by a $22 million claim reserve strengthening in the Transport Life block, which is a small component of the total Long Term Care Closed Block, with a high concentration of policies with lifetime benefits and inflation riders. It is important to note that the ATL block, which has had $54 million of reserve strengthening adjustments in Q4 2006, performed as expected this quarter. It is also notable that the number of new claimants this block were down approximately 15% from 2006 levels. We believe this reflects our claim adjudication improvements and, if sustained, should lead to significant bottom line impact in the coming quarters. The interest adjusted benefit ratio for Q1 2007 was 105.3%. The impact of the Transport Block claim strengthening was an increase of 28 percentage points. Now I will turn it over to John Wells to review progress on the turnaround program for the Closed Block.

Thanks, Gene. As in last quarter's call we would like to provide an update on our program for improvement which includes premium rerates, claims management improvements and technology. We continue to make steady 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 May 1, 2007. We're pleased to report that we have attained 100% of our $56 million goal in submitted filings to the states for their approval for this round of rate increases. This was accomplished six weeks ahead of our original plan. We have received approval from the states totaling $26 million. This represents 62% of our goal that we ultimately expect to receive in approvals. We have implemented approval rate increases totaling $21 million in enhanced revenue or 59% of our total goal of $35 million. These rate increases will take effect at the next premium billing date of the related policies. The vast majority of the net revenue enhancements from this round of rate increases will come on a run rate basis by the end of the first quarter 2008. Additionally, we estimate that approximately $1 million of the rerate impact is included in Q1's financial results. Having attained our goal of first round filings to the states for approval, we're currently planning a second round of filings to commence by early third quarter 2007.

Turning to claims management, the claims processes that we have implemented are beginning to show positive results. Through partnership with leading LTC administration companies, results are emerging that include both accuracy of payment to policy language, and enhanced customer experience. We expect that these operational improvements will drive increasingly material financial benefits as 2007 progresses. To date, we project that this improved claims adjudication to policy language is resulting in a $4 million run rate benefit per quarter on the block. Slightly better than $1 million of these operational improvements are included in Q1's financial results. As discussed in Q4 investor call, we believe this higher level of precision in our LTC claims processes will ultimately result in a $10 million quarterly run rate impact by the end of this year. This impact comes at the same time with strength in compliance, meaning that the claims management improvements benefit our both our overall in-force policy base and our shareholder returns.

We announced the closing our Florida case management office in February, as the relocation of these activities will yield $1.5 million in operating expense reductions while also enabling us to enhance the effectiveness of this function. An example of this enhance effectiveness is that we are in the process of expanding geographic coverage of case management from 20% of the country up to 100% of the country for those claimants eligible for managed care. Related to compliance, the claim appeal and claim review panels we discussed in the previous call have provided increasing focus in our efforts to ensure appropriate and compliant claims decisions. These panels are staffed with cross disciplinary resources where claims denials are reviewed for consistency with our improved adjudication processes and a claims appeal panel to review escalated cases. We also continue to retain Long Term Care industry experts to assist us in improving our operational efficiency and Customer Service. These experts are deployed on multiple fronts including claims, policy administration, and in the rerate filing process.

We are on track to implement an integrated policy benefit repository and accumulator tool in the middle of this year. This tool will enhance electronic access to policy benefits and payment history, which will drive more accurate and efficient claim adjudication. During Q1, we implemented a tool for streamlining some of the most complex Customer Service transactions, resulting in improved cycle times and cost efficiencies. This tool allows to us more quickly and accurately process transactions related to the non-forfeiture options being offered to eligible policy holders. We are also approaching the conclusion of an effort to select a strategic LTC claim processing system. The strategic system in concert with improvements in claims processes will better enable us to pay claims more precisely to policy language and improve Customer Service.

Consistent with our message in the past two investor calls, it is important to realize that it will take time for these actions to drive improved performance. We remain focused on managing the LTC Closed Block initiatives as previously noted and fully expect accelerating progress, process, and financial implementation to become evident as we progress through 2007. In summary, LTC Closed Block financial results for the quarter are again volatile, but reflect an improvement since the fourth quarter. Importantly we feel the Transport Life claim reserve strengthening of $22 million is not indicative of a trend for the larger LTC run-off book. As Gene mentioned, the experience of the ATL block, the largest block within LTC run-off, is demonstrating better results. We have made meaningful progress on our plan for improvement, including achieving key milestones in our $35 million rerate program, continuing improvements in claims management practices, and enhancing our systems tools. Now I will hand it back to Gene for a review of the remaining financials. Gene?

Slide 18 consolidates several of the more important indicators. Book value per share, calculated as if the preferred stock had converted, which will occur later this month, decreased slightly from the fourth quarter to $25.24, reflecting principally an increase in preferred dilution. Our debt to total capital, calculated excluding accumulated other comprehensive income, was approximately 17% at the end of Q1 as compared to 15% a year earlier and 17% at year end. Risk based capital at our insurance companies remains very strong, ending Q1 at 342%. Debt investment income on general account assets for the first quarter reflects earned yield of 5.83% and new money yield at 5.90%. Yields have improved for the past five quarters as expected despite the low level of prepayments and the low interest rate environment. Investment quality remains high, although we have increased our (inaudible) investment grade position modestly, credit quality remains excellent. We have essentially no exposure to subprime mortgage backed securities.

Slide 19 arrays the most recent five quarters of aggregate interest adjusted health benefit ratios. Despite volatility within lines, our core business ratio was quite stable. The impact of reserve adjustments arising from data coding issues in specified disease reduced the aggregate ratio by 3.7 percentage points in Q1 '07 and increased the ratio by 2.8 percentage points in Q4 '06. Despite the strong growth in new sales and collected premium, gross operating expenses are relatively flat year-over-year. We are on track to achieve our targeted cost reduction of $25 million annually commencing in 2008, resulting from our back office consolidation project.

Turning now to segment results, beginning with Bankers. Record sales at Bankers were driven by private fee for service enrollees. Lower earnings results from increased amortization of insurance intangibles in our Medicare Supplement and Long Term Care lines of business. The decrease in earnings for the quarter resulted in an ROE of 5.9%. Bankers results reflect higher amortization of Medicare Supplement insurance intangibles of $15.5 million dollars, resulting from increased lapses principally attributable to customers switching to Med Advantage plans, partially offset by $5.6 million improvement in margins on Medicare Supplement due to higher revenue and improved loss ratios. Another factor was higher amortization of Long Term Care insurance intangibles, up $4.1 million due to changes in assumptions for future rate increases. First quarter results also reflect the increasingly significant seasonality impact of PDP and PFFS business. The Med Supp benefit ratio improved from 68.1% in Q1 '06 to 66.6% in Q1 '07 consistent with our expectations. Although we experienced a decline in Medicare Supplement sales for the first quarter of 2007 which equated to about 2,200 policies, this decline was more than offset by our success in sales of private fee for service plans. We sold over 22,000 Med Advantage policies through the end of the first quarter. We're also successful in cross-selling a second Bankers product in roughly 12% of the new households acquired through the sale of a Medicare Advantage plan. We're obviously pleased with our sales results as our collected premium continues to increase, and our career agents are becoming increasingly well positioned as experts in the full spectrum of Medicare products.

The LTC loss ratio reflects a modest improvement last quarter, during which we booked $8.4 million of claim reserve strengthening. LTC net margins were approximately as expected. With our most recent rerate initiatives substantially complete, we are commencing our review and consequent filings where we believe additional rerates are justified and prudent. Moving to CIG -- although CIG sales were down 13% for the quarter, this is driven by a significant decline in PDP sales, with no offsetting PFFS sales since CIG is not part of the Coventry PFFS partnership. Specified disease sales were up 26% and annuity sales were up 256%. Additionally, we recently signed an agreement with the largest independent distributor of Med Supp insurance, and we have increased our resources and work site sales to expand distribution for our specified disease products.

Earnings in Q1 2007 resulted in a return on equity of 5.9% for CIG. CIG's operating results reflect unusually high mortality costs of approximately $10 million. You have variance fluctuations in mortality and Life Book, but it is a very mature book, and mortality is expected to revert to the mean over a reasonably short period. We also booked a reserve release in specified disease return of premium reserves of 19.3 million resulting from the discovery of coding issues as we proceeded with our remediation efforts related to actuarial control weaknesses discussed last quarter. In addition, we increased litigation reserves for the R-factor case, based in part on our review of preliminary date on on policy holder benefit selections. This increase of a total of $13 million is incurred half in CIG, or $6.5 million, and half in our corporate segment. CIG's Med Supp benefit ratio was 66.9% in the first quarter of 2007 compared to 60.3% in last year's first quarter and 64.1% in the fourth quarter and consistent with expectations. CIG's interest adjusted specified disease benefit ratio was 20.4% in Q1 '07 compared to 45.9% in Q1 '06 and 52.5% in Q4 '06. Claim experience has been trending favorably in the last two quarters with data related reserve adjustments producing loss ratio volatility. Normalizing for these adjustments, the interest adjusted ratio would have been 41.8% in Q1 '07 and 37.7% in Q4 '06.

Moving to Colonial Penn, earnings for Colonial Penn in Q1 produced a return on equity of 8.7%. Earnings were impacted by an outer trend increase in mortality. Colonial Penn experienced sales growth of 24% for the quarter with strong growth in lead development, the leading indicator for a direct marketing organization. Colonial Penn also experienced strong growth in reactivation campaigns and has continued stable earnings. As we announced yesterday, through 100% co-insurance agreement, we sold through a competitive bidding process a block of annuities with approximately $3 billion of statutory policy and other reserves. This block of business consisted of approximately 134,000 policies that were mostly sold in the 1980s and 1990s. The sale of this business will help us reduce administrative systems in CIG. We expect the transaction to close in late 2007. With the seating commission of approximately $76.5 million and capital that is supporting the business of $175 million, we will be able to enhance Conseco's ROE through either share repurchases or investing in other higher ROE businesses. Expect to record a GAAP after tax loss of $65 million plus earnings on this block as defined in the agreement from the effective date to the closing date. $8.7 million of this expected charge was recorded in Q1 '07 as part of our realized losses for the quarter relating to losses on assets that we expect to transfer to the buyer upon closing. These assets were in an unrealized loss position on March 31, 2007. Now I will turn it back to Jim Prieur. Jim?

Thanks, Gene. As we discussed for awhile, turning around the LTC run-off business will take a few quarters, and we're likely to have volatility in reported earnings during this interim period. But we are making real progress on this turnaround, and I will reiterate what I said last quarter -- that we expect the pretax earnings run rate to be up by $100 million by year end, and this will come $40 million due to better claims management in the LTC block, $35 million due to rerates, and $25 million due to increased operational efficiencies from the project announced in December. We are making progress on all of these areas, but there are lags before you see the impact directly in the quarterly earnings. Selling the $3 million block of old annuities removes a block of business that was earning a fairly low return with little prospect for improvement and loss of convexity. It helps to simplify the business by taking out four systems entirely. It provides an opportunity to move capital around the organization to buy back more stock and look for higher return opportunities. As I mentioned earlier, the Company has set a target of 11% return on operating equity capital as a target for 2009, and importantly has baked that target into the long-term incentive plan for senior management. The recent grant of ROE performance shares only pays anything at all when operating ROE is at least 10% in 2009. The companion grant of total shareholder return performance shares pays only when total shareholder return is in the top half of our insurance company peer group. These are achievable goals which we expect to make. Now we will open it up for your questions. Operator?

(OPERATOR INSTRUCTIONS) Your first question comes from Tom Gallagher.

Good morning. A few questions. The level of one-time charges here were still very high. Can you talk about organizationally what's happening on that end? I presume it has something to do with the controls issue and maybe when we could start to see in all likelihood the reported EPS get closer to core EPS? That's question number one. Number two, any other opportunities for sale of underperforming blocks of business including what's the end game for the run-off block of Long Term Care, and then last question, just on the buyback authorization of $350 million, that's I believe more than is currently allowed in one of your debt covenants. I presume that means you would be looking to restructure the debt covenant. That's all I had.

Okay. Well, I will take those, Tom, and thanks for the questions. With respect to the taking them in reverse order, with respect to the debt covenant patterns -- you're right that there would have to be an adjustment in the debt covenants, and that would be something we would be looking for. With respect to any other opportunities to sell other blocks of business, I think we said for some time that Conseco has in aggregate a very large exposure to the Long Term Care business, and that for a company of our size, we have too heavy a weighting there, but that's a long-term objective to reduce that weighting, and first what we want to do is improve the performance of the block before we would do anything. With respect to your first question, the level of one-time charges -- some of the charges are seasonal. Mortality of course is something that happens in the insurance business. Otherwise there wouldn't be an insurance industry. With respect to remediation of all the control issues, it is something we're working on and we're going to confirm in the 10-Q that we hope to have a few quarters under our belt of steady results before we would change our conclusion that- - or come to the conclusion that we have totally remediated the problem.

And one follow-up, Jim. Do you think it makes sense organizationally here in terms of the money you're going to be getting and the capital being freed up from the sale of that block of business -- if the endgame is to shrink the Long Term Care business, does it make sense to be less aggressive on the buyback, maybe hold onto some of that cash to fund a potential charge if one were needed to be taken when -- if you were to shrink your LTC exposure?

Certainly when you look at all of the capital commitments the Company might have, that sort of thing would be taken into consideration.

Thanks.

Your next question comes from Andrew Kligerman.

Good morning. Just sort of on the volatility. Could you help me understand a little better why the charge in transport cropped up and why it wasn't caught in the fourth quarter, and why we shouldn't expect to see situations like that going forward? That's one. Then sort of along the same lines -- that R-factor charge or true-up on the settlement there, give me a sense of what Conseco's legal situation is like. Can we expect to see continuous pops from the litigation standpoint -- continue to be surprised by that? How do you stand on that front? And then I will have one last follow-up.

Well, maybe I will talk about the R-factor first, and then I will let Mark Alberts talk about the volatility. When you make a settlement like the R-factor, of course, you made a whole bunch of guesses -- estimates of what you think might actually occur, and then as you roll forward you can sharpen up those estimates. And so that's sort of what is happening there. With respect to the charge in the Transport block, Mark?

Jim, just back to that R-factor. Just from a litigious environment which in which you operate, how do you feel going forward? Do you think there are legal issues, heavy ones confronting you right now?

I think anyone in the insurance business is always going to confront some litigation, and there is going to be some disputes about things that were done in the past. The R-factor settlement is -- we're talking about little refinements to say the number. It was a large number. That was a relatively minor thing going forward.

You don't see anything major on the horizon then from a litigation standpoint that would affect --

If there were, of course, we would have to reveal it, yes.

Okay.

Mark?

With regard to Transport, I will mention that our Transport block uses more of an aggregate reserving approach than our larger ATL block, which calculates claim reserves on a policy by policy level. And by nature an aggregate approach is a little slower to respond to changes in experience. So we saw in the development for the quarter that there was some deterioration in transport which led us to study the mix of business. And as Gene mentioned earlier, the mix of claims between lifetime and non-lifetime benefits, inflationary, noninflationary benefits we observed was shifting some, and we felt based on the experience for the quarter that it was appropriate to reflect that shift in our reserving.

And just lastly, I think Gene threw out earlier a comment about the number of claimants in the run-off LTCI segment declined by 16%. Could you give a little more color around that? How many claimants actually are out there and if the claimants are declining, why does the loss ratio keep going up?

I will take that one as well. Gene's number of 15% referred to the number of new claimants.

Okay.

And what was specifically in the ATL block. And so overall we didn't see a similar decline in the number of individuals who are receiving claims, but we are seeing that our efforts on adjudicating new claims are starting to pay off, and that will flow in over time.

Thanks very much.

Thanks, Andrew.

Your next question comes from Joan Zief.

Thank you. I have a few questions. When you think about your statutory earnings this quarter, with respect to what some of these special items were, are you feeling pretty comfortable about the statutory earnings or how should we think about how those earnings are progressing?

Well, certainly when you increase the strength in claim reserves, it has a direct impact on statutory earnings, and in our case it also because Conseco Senior Health is operating at minimum capital when we incur losses through reserve strengthening we have to put capital in. And we're in the process of putting an additional $40 million of capital into Conseco Senior Health. In terms of overall earnings, statutory earnings are pretty good for the quarter -- actually we had a very good Bankers stat for the quarter. So when you normalize for what we believe to be, we're getting as we proceed through our evaluation of our claim reserve status, -- I think we feel pretty good about where we ended up with the ATL block and now I think we strengthened the Transport block. We think we should be seeing a more stable pattern of statutory earnings moving forward.

On your long-term care rerate, when you go forward, are you taking into account that you may ultimately get some adverse selection and did that go into your sense of what that long-term run rate improvement can be?

The rerate projections do take into account particularly from a reserving standpoint the impact of anti-selection as we communicate revenue numbers, the $35 million revenue enhancement target -- that's strictly revenue, so that would not reflect any anti-selection, but certainly as we book those into our financials that is taken into account.

Okay. My last question is really just about the sales. Can you give us a little update about Bankers sales for agent [pro] activities, that sort of thing? And, Jim, can you speak to your view about third party as a distribution channel given your decision at this point to maintain the Company as a B plus plus rating? Do you think we need to change our expectations of what sort of sales numbers can come out of CIG?

Okay. The first question?

I think Scott is on the line.

I can address that, Jim, and Joan. Regarding Bankers agents' productivity, obviously for the quarter we're very, very pleased with the productivity. The results quarter over quarter were significantly up with the salesforce that's just slightly larger, so you can do the math, and see that we had productivity improvements as measured by new annualized premium per agent in excess of 15%, so we're very pleased. The other obviously driver to gross sales is grow the agent force in volume, and we're doing that as well. Our agent force for the quarter is also up about 10% period over period, and I think -- don't hold me to the exact number, but the average agent force for the quarter is about 4,300, but we finished March closer to 4,400 in total agents. So we're focused in both areas -- continuing to improve productivity per agent, and growing our agent force, but the productivity is the thing that we're focused on. PFFS obviously had a big impact to that, but not only selling the PFFS product specifically but as Gene mentioned, the ability to cross-sell into those households of all of the MA households, both the PDP households and the private fee households, has helped improve that productivity significantly as measured for instance by life sales. Life sales for the quarter were up nearly 20%.

Joan, with respect to the third party distribution channel, I think we're making some real progress on CIG. The sales mix did change, but it changed in our favor. Last year there were some prescription drug plan sales that were in Q1 that weren't anywhere near as large this year. If you took that out, sales were up slightly, and not only that, but we got a lot more specified disease sales in this most recent quarter. So I think we are making progress. And the comment about gaining access for Med Supp to the largest distributor of Med Supp in America -- hard to know what share of their business we'll get. I think in third party distribution we have to pick them off one at a time, but Mike Dubes and his team has done a very good job, and obviously that one Med Supp contract alone could have a significant impact on our sales going forward. Clearly longer-term as the company starts to improve and continues to improve, we will eventually get a ratings upgrade, and when we get a credit upgrade, then we should be positioned to grow even faster in third party distribution.

Thank you.

Your next question comes from Josh Smith.

Hi. Thanks for taking the call. Apologize if I don't have this answer -- I was not in a position where I could see your presentation. But any thoughts to giving more detail on the Long Term Care Closed Block in terms of number of claimants, average cost per claim, things of that nature so that we can sort of see what the progress is?

Hey, Josh, we can barely hear you. Can you speak up a little more?

Sorry. I am looking for more detail on the number of people on claim in the Long Term Care block and how that trended over time and with the size of the average claim? The policy lives.

This is John Wells. For our Closed Block at any given point in time we probably have an inventory of about 12,000 claimants coming in each month, probably about 1,000 of which we consider new claims to consider. We pay out about $400 million a year in claims. The average claim I guess on average when you consider everything is a little over $3,000. Claimant payment amount reserved of course would be different than that. Unit costs -- we're still working through that to get some information on that throughout the enterprise, but that's a number we should have in the months ahead.

So, Josh, I think what we'll try and do is try and get more information into the quarterly package. We've been gradually expanding the kind of information we've been providing, but we didn't add a lot more information in this particular quarter. But it is a good reminder that more information would be useful for you. Thank you.

Thanks. Just another quick one on Transport. $22 million charge on a pretty small block. I felt comforted by the fact you don't have a lot of lifetime benefits, and you don't have a lot of inflation-protected, the business is obviously one that sort of did have that issue. What percentage of your total business that has lifetime benefits or inflation protection did this represent?

Within the Closed Block between 20 and 25% of the business has lifetime benefits and likewise between 20 and 25%.

That's what I understood. How big was Transport as a percentage of that total?

Transport represents about 25% of the total block.

Transport life represents 25% of the total block.

Yes.

As measured by premium.

Right. Yes.

I guess I thought it was when I read the release it was a smaller block it sounded like -- a problem on a smaller piece of business. Did I read that wrong?

25% of the block is certainly smaller than 75% of the block, and the concentration of lifetime benefits and inflation policies, inflation riders is higher in the Transport block than would be in the ATL block.

Okay.

I want to correct myself there. Transport is actually closer to 20% of the total rather than 25.

I just thought it was a really, really small piece. Okay. All right. Thanks a lot.

Thank you.

Your next question comes from Jukka Lipponen.

First, I want to wish Gene well in your retirement.

Thank you.

Secondly, I wanted to ask Ed Bonach, who I understand was available for Q&A, considering that Conseco obviously is very much a turnaround story at this point, and a company obviously still has some systems issues, et cetera -- what sort of attracted you to the Company and made you comfortable there weren't time bombs waiting to go off?

Well, thank you for your question. I did do in the interview process what I thought was reasonable due diligence first of all -- certainly Conseco being a public company, I followed it for some time, and was aware of it its market position and strategy and issues as well. But I joined for the opportunity and the potential, and I believe in Conseco's mission. And with Jim Prieur as a proven, seasoned insurance executive, and he and his team have put what I believe is a sound strategy in place -- my hope and expectation is to positively contribute to the further development of that strategy, and its execution.

And, Jim, on last quarter's call you talked about -- I think you mentioned that there were 10 more systems that you sort had to go through and you could find various things. Can you give us an update on where are we now in that process?

I don't remember being quite that specific, but with this transaction with Swiss Re, of course, four the systems will be shut down as they take over the administration late this year, early next year. And so we'll been getting rid of those. And we'll be working on continuing to reduce the amount of complexity the organization, through our IT strategy. One of the difficulties with all of this is people would like to think if you got 10 systems or 16 systems or whatever the number is that they're all equally complex. And of course they're not, and some of the smaller ones can be trickier than some of the larger ones, but we are continuing to work on making the business simpler.

Lastly on the mortality, considering that your target customer is an older person on average, isn't it realistic or reasonable that you could generally have on average higher first quarter mortality considering that I believe there is some actuarial evidence that some of the older people tend to die more in the first quarter after the holidays?

This is Mark again. The answer is yes. We certainly do see a seasonal pattern, and first quarter tends to be our highest quarter. The $10 million we referred to reflected mortality over and above our normal level of seasonality, but you're absolutely right.

Thank you.

Your next question comes from Mark Finkelstein.

Hi. First a detailed question. Can you tell me what percentage of the Bankers Med Supp block lapsed in the first quarter, and how many enrollees roughly that approximated?

I am not sure we can give that to you right off the bat, but we can probably no doubt we can get it in unless you have it, Scott.

Not the exact number. I would rather get back to Mark on that.

Fair enough. I guess secondly, thinking about Conseco Senior Health, the STAT entity, you mentioned putting $40 million of additional capital into that company. I guess what I am curious about is two things. One, what is your total forecast of additional capital that you would be putting in there? And I guess secondly, just thinking about the charges that were experienced in 2006 and again kind of early 2007? Are you getting any push back from the regulators in terms of what was originally agreed or how much capital or how much reserves are being held on that business just knowing the volatility in that block?

I would rather not comment specifically. We do get our capital plans -- we have some capital reserved in case we need to put additional capital into Conseco Senior, but I think that's not a number that we'd be comfortable going public with. And we certainly work with our regulators very closely, and they do triennial exams and review reserving assumptions, and we have detailed and continuous communication. So I don't think there are any disconnected expectations, and I think we're on track to meet the statutory requirements as we and our regulators understand them to be.

Okay. Thank you.

At this time there are no further questions.

Okay. I will turn it back over to Jim Prieur for closing remarks. Jim?

Well, thank you. Thank you, operator. Thanks to everyone to joined us for this conference call. Just to remind everyone that Conseco is focused on the senior middle market in America, and is the fastest-growing major segment in the American market. We have a unique sales machine dedicated to the market, whether it is 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 now disconnect.