CNO Financial Group Inc (CNO) 2007 Q2 法說會逐字稿

Good morning. My name is Tracy, and will be your conference operator today. At this time, I would like to welcome everyone to the second quarter earnings call. All lines have been placed on mute to prevent any back ground noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you. Mr. Jim Rosensteele, you may begin your conference.

Thank you, operator. Good morning and thank you for joining us on Conseco's second quarter earnings conference call. Several key Conseco Executives are on the call with presentations today, including Jim Prieur, Conseco's CEO, Ed Bonach, Chief Financial Officer, Eric Johnson, Chief Investment Officer, Mark Alberts, Chief Actuarial, and John Wells, Senior Vice President of Long-Term Care. Also joining us for our question-and-answer session will be Mike Dubes, President of Conseco's Insurance Group, Scott Perry, President of Bankers Life, and Gregg Barstead, President of Colonial Penn Life.

During this call we'll be referring to information contained in yesterday's earnings release. You can obtain the release by visiting the Company news section of our website at Conseco.com. During the conference 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 on Thursday. 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 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'll turn the call over to Conseco's CEO, Jim Prieur. Jim?

Thanks, Jim. Results for the second quarter largely reflect the significant increase in the LTC Run-Off block claim reserves. Despite the large loss this quarter, we continued to make real progress in the underlying operations of that business which we'll be discussing later. As we stated on prior calls, it will take several quarters before our improvements in claims management and in re-rates make their way to the bottom line. So overall there was a loss in the Run-Off block of $133 million. Of that amount, $118 million was an increase in claims reserves related to earlier periods. And of that amount, $110 million was a deliberate increase in the claims reserves that we chose to take. As Mark Alberts will discuss in a few moments, we have incorporated a new assumptions that are much more forward-looking than before. That together -- all of these changes -- account for this increase in claims reserve in the block, and it moves the claims reserve to $940 million. This is a very conservative move, which should improve the stability of the results of this block moving forward.

Sales overall increased by 10% versus the second quarter of 2006. Boosted by continued strong performance at both Bankers Life and Colonial Penn and the mix of sales at CIG, again, improved. Total sales of Bankers grew by 19% year-over-year, with an exceptional showing life sales which were up 30% and sales of private fee for service products. Colonial Penn's total sales grew by 23% versus the second quarter as we continued to invest in marketing and lead generation. At CIG, while sales were down the mix of sales improved with specified disease products up 31% year-over-year. Specified Diseases share of new sales at CIG, rose from 30% in the second quarter last year to 48% this quarter.

Moving to new business, as this slide five shows, growth of new business of approximately 10% was driven largely by the growth in Bankers new business. Bankers PDP and PDF sales rose from 8.2 million in the second quarter last year to 22.9 million in the second quarter of 2007. Also Bankers Life Insurance sales increased by over 30% compared to the year-ago period and Colonial Penn sales were up 23%. Slide six, shows the collected premium was down about 1% compared with second quarter of 2006. While the full fourth quarter trailing premium number grew by more than 9%. Our year-to-date annualized operating return on equity excluding the litigation charge from earnings as well as excluding our NOL tax deferred asset from average equity and assuming conversion of our preferred stock for all periods was 2.4% the last four quarters ended June 30, 2007, and has been declining on a trailing four-quarter basis, principally due to negative ROE in our run-off segment.

As a reminder these segment GAAP ROE calculations are based on the method described in the notes to the slide which start by describing statutory capital to lines of business based upon risk-based capital. The Company, to remind you has set a long-term goal in improving its ROE to 11% for 2009, which I'm confident we will achieve. Next up is our CFO, Ed Bonach, who will take us through the financials. Ed?

Thanks, Jim and good morning. Starting at the parent company level, slide eight replicates the EBIT table in earnings release. I will be commenting on each operating segment later on in separate slides.

Turning to slide nine, as detailed in yesterday's press release, the net loss applicable to common stock for the second quarter was $64.5 million. This included $10.1 million of net realized investment losses or $0.06 per diluted share, resulting in an operating loss per diluted share of $0.32, as compared to a $0.21 loss in the second quarter of 2006. The current quarter included a number of adjustments that need to be evaluated in comparing these results to expectations and earnings trend. 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 $133.2 million in Q2 '07, compared to operating income of $4.4 million in Q2 '06, and a loss of $30.9 million last quarter. This quarter's results include significant reserve strengthening that Jim mentioned. Now I'm going to call on Mark Alberts, our Chief Actuary to take us through a more detailed discussion of the closed block financials. Mark?

Thanks, Ed. Before I discuss the results for the closed block this quarter, I would like to remind you that long-term care claim reserves involve complex calculations and a large number of assumptions about future claim payment experience. LTC claims have a long payment tail and experiences emerging rapidly for our book as well as for the industry, so past experience is not a guarantee of future experience. By necessity our reserving methods and assumptions are based on historical experience and there's no assurance that actual claim payments in the future will match our assumptions. In Q2, even before the reserve adjustments, we observed that our estimates of prior-period-incurred claims were continuing to develop adversely in spite of our past strengthening efforts. As we do each quarter, we closely reviewed our methods and assumptions in light of this emerging experience, and made adjustments that our reserve calculations did not adequately capture the recent experience.

It is very important to understand that this quarter we went a step farther and made a decided effort to get ahead of the experience rather than just keeping up. Our claim reserves now reflect for the first time an assumption that policyholders will remain on claim longer in the future than our historical assumptions would suggest. Going forward, this means that up to a point, adverse development should not cause reserve adjustments, which should produce more stable results. This also means that if this adverse development does not occur, we might expect to see favorable results.

In the next couple of slides, we will provide some additional information that we have not discussed in past calls, which could help to clarify the impact of these changes. With that introduction, I will discuss the quarter in more detail. As Ed said, the second quarter loss in the closed block was $133 million, and these results reflect a $118 million increase in our estimates of claims incurred in prior-periods, including $110 million of reserves strengthening that resulted from improvements in our reserving methods and assumptions. As I have already described, this level of strengthening reflects our efforts to use more forward-looking assumptions in light of our past efficiencies and recent experience. Approximately $55 million of our reserve strengthening relates directly to these forward-looking assumption changes. The remaining strengthening relates primarily to improvement in claim inventory adjustments on the American Travelers block, and an additional refinement on the transport block for an increase in claims with lifetime and inflationary benefits. We discussed the transport shift in claim mix on the first quarter call. The premium re-rate and claim initiatives that John Wells will discuss in a moment are on track but are not yet having a significant effect on financial results.

On slide 12, you see some detail of long-term care benefits we have not discussed previously. Our benefits are comprised of incurred claims plus the increases in reserves for future benefits. In early policy years, incurred claims tend to be low, and the increase in reserves makes up a large portion of the total benefits. As policies age, the incurred claims increase, while the increase in reserves for future benefits becomes smaller, and eventually, these reserves begin releasing to fund a portion of the incurred claims. The claim reserve changes we have discussed, including the reserve strengthening are part of the incurred claim line, not the increase in reserve line, and the incurred claim line exhibits significant volatility as a result. The verified basis incurred claims shown at the bottom of the page reflect our current estimates of the claims incurred in each prior-period. As such, the verified basis incurred claims normalize all periods for claim reserve strengthening, deficiencies and redundancies, providing a clearer picture of emerging trends and our expectations of the ongoing level of incurred claims. Verified basis incurred claims have been between 115 and $125 million in each of the last five quarters. The increase in reserves for future benefits varies around zero in all periods, except the second quarter of '06, which reflected a $9.4 million release of redundant reserve. These results are consistent with the age of our block. The $3.3 million reserve decrease in the second quarter current year reflects favorable persistency experience. We would expect the reserve for future benefits to start to decline in the next couple of years, off setting the expected increases in incurred claims.

On slide 13, we are also showing our benefit ratios on a verified basis for the first time. Our Q2 benefit ratio of 297%, and interest adjusted benefit ratio of 237%, reflect our reserve strengthening. On a verified basis, our benefit ratio without interest adjustment would have been 145% in the quarter.

On slide 14, you see the trend of our long-term care reserves, and the insurance acquisition cost to asset, also a detail we have not discussed in previous calls. As I described, our reserve strengthening all relates to the claim reserve, which represents about 29% of the net liability. The claim reserve increased $124 million in the second quarter and has increased $209 million since the second quarter of '06, driven by our strengthening efforts. The reserve for future benefits has been flat and represents 76% of the net liability. The insurance acquisition cost asset is 5% of the net liability and is amortizing or declining at about 12% per year. We evaluate the recoverability of this asset each quarter typically with a more in-depth analysis at year-end. In light of the second quarter development, we performed a detailed review this quarter, including updating our projection models for the most recent experience. Under our best estimate assumptions, the insurance acquisition cost asset remains recoverable with a moderate margin. Now I'll turn it over to John Wells to review our progress on the turn-around program for the closed block. John?

Thanks, Mark. As in last quarter's call, we would like to provide an update on our program for improvement, which includes premium re-rates, claims management improvements, technology, and organizational design. Important progress is being made in each of these areas. Moving to slide 16, 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 the activity through August 3, 2007. As discussed in the first quarter call, we have attained 100% of our $56 million goal and submitted filings to the state for their approval for this round of rate increases. We have received approvals from the states, totaling $35.2 million. This represents 84% of our goal with the remaining approvals expected to be received by end of this year. We have implemented approved rate increases, representing $28.4 million of enhanced revenue or 81% 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 enhancement for these -- for this first round of rate increases will come on a run-rate basis by the end of the first quarter of 2008.

Having attained our goal of first round filings to the states for approve, we have begun our second round of filings. Our goal for the second round is $46 million of submitted filings. We expect to finish the second round of filings by the first quarter of 2008. We have a goal of $28 million of approvals, which we expect to be completed beginning in the third quarter this year, through the fourth quarter of 2008. With respect to billings, we would expect to implement $22 million of rate increases, beginning with the third quarter of this year, and completing in the first quarter of 2009.

Turning to slide 18, in the area of claims management, we continued to implement claims best practices by partnering with leading LTC administration companies. The results include improved accuracy of claim payments in accordance with policy language, enhanced customer service and stronger compliance. Specifically, we have begun recertifying our active long-term care claims. Recertifications are periodic reviews of previously approved claims, to ensure that policy benefits are payable, and that an appropriate level of care is being received by the claim. Through the utilization of more active case management, in person assessments and other actions, we project these recertifications to drive a reduction in unwarranted claims liabilities and more accurate payments in accordance with policy language.

On slide 19, a positive development on the technology and organizational design fronts, which we announced in mid-July, is our study of a system and operational solution for a run-off long-term care group, better known at LTCG. LTCG is an industry leader with whom we are currently also working to implement best practices in our claims function. In addition to a review of their system tool, we are also considering the outsourcing of our run-off long-term care customer call center, continuing claim processing, and other operations transactions to long-term care group. Under the current proposal, Conseco would retain responsibility for adjudicating initial claims, handling claim appeals, compliance and financial reporting for the run-off loss. We are currently discussing requirements in related due diligence with LTCG and plan to make a decision regarding next steps by early fall.

In summary, consistent with our message in the past few investor calls, it is important to realize that it will take time for these actions to drive improved performance. Financial results for the quarter were impacted by reserve strengthening and recent experience, but important advances are being made to improve our business fundamentals through the multiple elements of our turn-around plan. We continue to make meaningful progress on our plan for improvement, including our $35 million rewrite program, relaunching on the second $22 million round of re-writes, realizations of claim payments, accuracy improvements, and the study of a sourcing of our system in select claim functions to a recognized industry leader. And now I'll hand it back to Ed for a review of the remaining financials. Ed?

Thanks, John. Slide 21 consolidates several of the more important indicators. Book value per diluted share reflecting the conversion of the preferred stock in May, decreased from the first quarter to $24.90, reflecting principally the loss during the quarter. Our debt in preferred stock to total capital ratio calculated excluding other comprehensive income was approximately 20% at the end of the second quarter as compared to approximately 27% a year earlier, and 29% at year-end 2006. Risk-based capital at our insurance companies remains very strong, ending the second quarter at 330%. Net investment income on general common assets for the second quarter reflect earned yield of 5.83% and new money yields of 6.7%. Investment quality remains high. Although, we have increased our below-investment grade position modestly, credit quality continues to be excellent. We have very limited financial exposure to subprime asset backed securities consisting of approximately 1% of our portfolio, and mostly highly-rated A or better. Eric Johnson, our Chief Investment Officer will cover this in more detail later.

Slide 22, is rated the most recent 5 quarters of aggregate interest adjusted health benefit ratios. Despite some volatility within line our core business ratio is quite stable. The impact of reserve adjustments arising from data coding issues and specified disease reducing the aggregate ratio by 3.8 percentage points, in Q1 '07, and increased the ratio by 2.7 percentage points in the fourth quarter of '06. Gross operating expenses are relatively flat year-over-year, despite the strong relative new sales and collected premium. Q2 '07 does reflect higher litigation costs for the quarter and for the first six months of 2007. We remain on track; however, to achieve our targeted cost reduction of $25 million annually, commencing in 2008, resulting from our back office consolidation project. At this point, Eric Johnson, our Chief Investment Officer will briefly discuss the investment portfolio. Eric?

Thank you, Ed. And good morning, everybody. To reiterate Ed's comments investment income increased to $381 million for the quarter representing a yield of 5.83%. Our ability to sustain an increased portfolio yield has resulted from the redeployment of money further off the curve as some steepening occurred as well as increased allocations to private placements and promotional mortgages. Asset quality has remained a very high priority at Conseco. Our below-investment grade ratio remains very satisfactory. We have also emphasized as I'll describe in a couple pages, similar moderation as to regards to home equity securities.

As previously mentioned, low investment grade securities represent approximately 5.5% of our general accounting assets. This is a highly diversified portfolio which receives careful attention. This allocation has increased in recent quarters to some degree due to LDL ratings migration as well as new money investment. We are happy with its performance.

As slide 25 show, subprime home equity securities represent only 1.24% of our total portfolio, or approximately 300 million. While this is and will remain a volatile market, our portfolio emphasizes highly-rated tranches and is fundamentally performing to or better than expectations. For a few bullet points, it contains no down-graded securities, no negative-loss securities, no ABS CDO investments, no hedge-fund investments, and no exposure to substandard servicers. We think these bullet points say a lot about where we are today.

As slide 26 indicates our home equity investments are highly-diversified by Vintage as well. Which is a good thing in today's world.

Moving on to slide 27, we have tracked our performance at deal level. And our deal level performance has been very good, that's reflected in increasing support levels since transaction issuance. You are all aware, as we are, of the very substantial recent market volatility for certain structured securities. At this time, we have very limited mark-to-market loss exposure, and with those general comments, I'll turn it back to Ed.

Thanks, Eric. We'll now turn to the segment results beginning with Bankers. Strong second quarter sales at Bankers were, again, driven by growth in life insurance and private-fee-for-service. Higher earnings were driven by improved spreads and higher PDP, PFSS income somewhat offset by higher Medicare supplement amortization charges. The increase in earnings for the quarter resulted in the year-to-date annualized return on equity of 9.1%. Bankers results for Q2 '07 were slightly better than Q2 of '06, reflecting higher LTC margins. Earnings in the second quarter of 2007 improved considerably over this year's first quarter, benefiting from the higher LTC margins, and lower amortization of Medicare supplement insurance intangibles due to a reduction in last rates during the second quarter. The med-supp benefit ratio was slightly lower than in the second quarter of a year ago and up less than 3 percentage points from the first quarter of this year. Benefit ratios for the PDP and PFSS lines of business reflect the seasonal pattern of claim results. They are, however, consistent with pricing expectations, although higher than our other product lines.

On slide 33, the LTC loss ratio reflects an improvement from last quarter, and has improved slightly from the second quarter of 2006. As I said, LTC margins increased from last quarter, and this is due to favorable persistency. Moving now to CIG, or Conseco Insurance Group. Earnings decreased from the year-ago period due to decreases in earnings from our Medicare supplement and life business, partially offset by improved specified disease margins. CIG sales were down 18%, compared to Q2 '06. This is driven by a significant decline in Medicare supplement sales that was only partially offset by sales increases and supplemental health of 31% and annuities of 9%. Earnings in Q2 '07 resulted in the year-to-date annualized return on equity of 6.2% for Conseco Insurance Group. This calculation excludes the increased litigation reserves that we disclosed in our June 29, press release. CIG's Q2 earnings reflect a $6 million reduction in Medicare supplement earnings due to a higher benefit ratio and smaller inforce block. This reduction was offset by a $6 million increase in specified disease earnings due to a lower benefit ratio. CIG results also reflect a $21 million reduction in Universal Life earnings. This block experienced adverse mortality, and we were required to recognize additional amortization expense since our current estimates of future profits on the block indicated that a portion of our insurance acquisition costs were not recoverable.

Turning to slide 37, CIG's med-supp benefit ratio was 68.9% in the second quarter of 2007 compared to 56.9% in last year's second quarter and 66.9% in the first quarter of 2007. The second quarter of 2006 benefited from the release of policy benefit reserves related to increased lapses. CIG interest adjusted specified disease benefit ratio was 39.7% in Q2 '07, compared to 48.2% in Q2 '06, and 20.4% in Q1 of '07. Claim experience has continued to trend favorably over the past three quarters, with data-related reserve adjustments producing loss ratio volatility. Normalizing for these adjustments, the interest adjusted ratio would have been 41.8% in the first quarter of this year, and 37.7% in the fourth quarter of last year. There were no such adjustments in the current quarter.

Moving to Colonial Penn. Earnings for Colonial Penn in the second quarter of '07 produced a year-to-date annualized return on equity of 12.1%. Earnings were slightly ahead of the second quarter of 2006 and 46% better than the first quarter of '07 when earnings were impacted by an out-of-trend increase in mortality. Colonial Penn experienced sales growth of 23% for the quarter with even stronger growth in lead development, the leading indicator for a direct marketing organization. Now we'll turn it back to Jim Prieur. Jim?

Thanks, Ed. To repeat what I said before, turning around the LTC run-off business is something that will take quarters not weeks or months. And we'll continue to have volatility in reported earnings during this period. We believe we have taken significant steps to reduce claim reserve volatility and we continue to make progress on improving the business. Meanwhile our core businesses are becoming more keenly focused on driving profitable growth and delivering value for shareholders, customers and agents.

We're making real progress on this turn around, and I'll reiterate what I said before, which is that we expect a pre-tax earnings run-rate to be up $100 million at year-end. That will be $40 million due to better claims management in LTC, $35 million due to re-rates on LTC, which have all been filed, $25 million due to increased operational efficiencies from the project that was announced in December, which we're now extremely confident that we will achieve. We are making progress in all of these areas. These are achievable goals which we expect to make. And now we will open it up for questions. Operator?

(OPERATOR INSTRUCTIONS). We'll pause for just a moment to compile the Q&A roster. Your first question comes from Andrew Kligerman with

Yes, I have three questions. Let me ask the first one on investments. If I understood slide 27 correctly, about two thirds of the subprime exposure is rated single A or below. Could you give me some color as to what the thinking was when you bought those securities, and perhaps why you are not concerned going forward, that these securities could be downgraded further as it seems that those are the areas that are ripe for potential downgrades.

Andrew this is Eric Johnson. Thanks for your question. As you'll see on slide 27, approximately 55% of our -- what we're defining as subprime exposure is in the single A category. We look at these deals on a deal-by-deal basis, and we measure their performance since their issuance as well as what we invested in them, we can tell you with regard to each of those transactions they have continued to generate cushion or support in excess of our original expectations the time the deal was bought. In addition as you know, approximately a month ago, S&P, Moody's and Fitch released extensive catalogs of transactions which they were evaluating. Put on credit watch for potential down grades. If you aggregated their list that impacted covered over a 1,000 securities, of that over 1,000 securities we held zero. Zero, S&P, zero Fitch, and zero Moody's. So unless something unexpected would occur we would therefore not expect any of these securities to be downgraded. Although it always remains a possibility. We continue to be very satisfied with their performance. Obviously S&P, Moody's and Fitch continue to be satisfied with their performance, and we'll adopt an intelligent and hopefully thoughtful wait-and-see attitude.

Got it. Okay and then shifting over to the run-off long-term care block, I believe there were some slides showing that the verified claims ranged from about 115 million to 125 million, loss ratios of 117 to 148%. Given this -- given that you have taken another sizable reserve strengthening this quarter, and I know Jim Prieur just said that you can't expect it to turn around in a few months. It's going to take quarters, but these verified numbers, I mean, are these the numbers that we're, and they are certainly not attractive numbers, are these the numbers that we should expect over the next few quarters, given that you have kind of set up that reserve for adverse development going forward?

This is Mark Alberts, Andrew. I think that's an appropriate interpretation. Those verified loss ratios represent our best estimate of the most recent periods as we see them today, and absent further development in those prior-period claims, those numbers reflect the kind of levels that we would expect.

Mark, and do you kind of -- having done these studies and maybe you could talk a little bit about the extent of it, do you feel very confident going forward that you have kind of got it under control? Or do you think we'll see a bunch of new surprises in a quarter or two?

Well, obviously there are no guarantees going forward, and experience develops on a quarterly basis, so our reserves will respond to that experience. But based on the level of forward-looking, prudent estimates that we have put into our reserves today, based on our continued extensive review of our methods and other assumptions, I feel confident in the level of the reserve.

Just real quickly, lastly, the $21 million adverse mortality in the Universal Lifeline, what can we expect there going forward? I mean, is this going to be something that swings around a lot? What should we be thinking going forward on that line?

I think we will expect some volatility in this line going forward. As we -- as we pointed out in the slides, the results for the quarter reflected mortality as well as some additional amortization related to the -- related to the fact that some of our acquisition costs on this block were unrecoverable. And given that situation, we would expect this block not to generate a significant level of earnings going forward, and we always see some seasonal variation and some volatility related to claims, and that will flow through to the income statement.

All right. Thank you.

Your next question comes from Jukka Lipponen with KBW.

Good morning. First of all, Jim, one of your themes -- your theme has been the fix, focus and grow. As far as the fixing part of it, how would you characterize, what inning are we in at this point? And how much longer do you expect that the fixing phase will take?

Well, I think all along we have been thinking that the bulk of the fixing would get done in the first three quarters of this year, and we pretty much would be at a more ongoing run-rate by the fourth quarter. So that -- there's been nothing, really, that has happened that would change that assessment. Although, in almost every company you work in, there is always something you can find to fix, right? But seriously, the real answer is it will all get done this year.

And what is the status of the claims management improvements, the 10 million? What have we achieved so far? And how much of that was in the current quarter financials?

This is John Wells, I'll take that one. As Jim said, the results are going to take time to emerge. I would say a high-level estimate would be that the claims accuracy improvements that are being made right now have contributed approximately $3 million through the second quarter, compared to our former what our former practices would have allowed. And these improvements are going to -- are continuing and building over -- quarter-to-quarter, day-to day, quarter-to-quarter.

When we talk about that number, like a $3 million number, that's claims we would have paid using past practices, versus what we have paid. The run-rate will be higher than that, of course, because we're making changes as we go along, so -- and that's part of the problem with the lag that you see, is we have only got $3 million of that effort sort of running through the income statement in Q2.

And the -- for the run-off LTC book, the DAC, how much has the margin changed, say, in the last 12 months or the last 24 months? And how much more margin is there less before we would potentially have a charge?

This is Mark again, Jukka. The margin changes from one period to the next for a number of items, not only the claim development, but persistency, our latest expectations of premium re-rates and so forth. I would say in aggregate, there's been moderate deterioration in that recoverability margin, not a large degree of deterioration, and overall, that margin is somewhere in the neighborhood of 5% of the net liabilities.

And last quick one, to Eric, what is the current market value of your subprime portfolio?

Well, the materials provided here suggests that it is approximately -- as of June 30, 300 million. Now, since that time there has been two somewhat contravening effects. Rates are lower. This portfolio is positively convexed slightly. So that's to the good. Spreads are wider, so that's to the bad. I'm not sure I want to -- or that this material has been prior publicly provided, but I don't think it's materially different than what you see in front of you here.

Okay. Thank you.

You're welcome.

Your next question comes from Mark Finkelstein with Cochran Caronia Waller.

Good morning. Actually just a follow-up, I guess, on an earlier question. I want to make sure I understand something. Based on the -- kind of the period incurred loss trend in the run-off business, I think you are kind of at 115 million quarterly incurred rate, and you have kind of got, roughly a premium of, say, 80 million a quarter. If -- and you are assuming about 75 million of annual improvement from both premium and the claim handling improvement, assuming none of that really affected the current quarter, that would suggest a 20 million of improvement going forward, so there's still about a 15, $20 million deficit to get you back to 100%, call it loss ratio in the run-off business. I guess my first question is, is that math right in how I'm looking at it? And then secondly, what does that mean in terms of future additional rate action or other things that you can do to -- I guess, enhance the profitability of that block? Or can we continue to expect kind of pretty sizable loss ratios above 100% even after these effects come through?

Mark, thanks for your questions. This is Ed Bonach. The calculation you described, the one element that has to also be included in there is interest on the reserves, which is a significant component. The future of this business as John Wells indicated, we have already commenced the next round of re-rates on this business, so I think that's also an important factor in considering the profitability of this business going forward.

I guess I understand that, but I mean, is it the anticipation of looking to get this back to that 100%, non-interest adjusted loss ratio level or --

No. No. No. Mark older blocks like this interest income is a very significant number. Therefore, you are always going to be over 100%, simply because of the way the math works.

Okay. All right. I'll probably follow up on that --

I mean, just imagine $3 billion in assets roughly, multiplied by 6% roughly and you've got that interest income coming into the income statement.

I'm going back to commentary from several quarters ago where the rate increases were put in place and the intent was to kind of get it back into the 95 to 100%, but I'll follow-up with that. Second question is, I guess, with the charge that was put through in the quarter, what is the status with Conseco senior health capital position? And what is the status with the rating agencies in terms of how they have looked at this?

Mark, this is again, Ed, with Conseco Senior, we just took action yesterday to contribute $100 million there from ultimately the liquidity we have got at the holding company level. So it is appropriately capitalized. And-- feel that we have the ability to continue to have liquidity at appropriate levels at the holding company. The rating agencies, we have certainly have had discussions with them relative to our earnings and status. They are, as the investment communities digesting the earnings, and the status, and will be updating us as to their concerns or actions, if any.

Okay. All right. Thank you.

Your next question comes from line Joan Zief with Goldman Sachs.

Thank you very much. I just have two questions, so just to make sure I understand. You are moving forward with your progress on the closed block, and added extra reserves. But there is a few more quarters before things really take off. Does that mean that you expect a few more quarters of net losses in the run-off block before it turns positive? And if that is the case, can you talk a little bit about your capital position, your excess capital position at the holding company? And how you are planning to continue to fund the Conseco's Senior Health, if it needs additional capital downstream to it? So that's my first question. My second question is on Conseco Insurance Group, and the volatility. You had mentioned that with that mortality swing, you have to adjust your VOBA DAC accounts. If you have adverse morbidity swings in any of the products, whether it's the med-supp, or the specified disease, does that come along with also some major adjustments on the intangibles as well?

Joan, this is Ed. I'll start out in -- responding here. First of all, with contributing the $100 million to Conseco Senior, that's still leaves in excess of $100 million of liquidity at the holding company. And we feel we have ability there to fund additional -- losses if they did occur, and then on top of that as of course we have previously announced with the annuity reinsurance transaction, we would expect to free up capital as a result of that transaction, which is still on track to close this year. As far as the run-off block and future losses or lack thereof, with extracting or removing the reserve strengthening of 110 million that we did in the quarter and looking at continued improvements going forward from rate increases as well as claims management, if there are losses, we would expect them to be modest as we would look toward the rest of the year.

I'm sorry, how much are you expecting to free up from the annuity transaction?

About 250 million.

And that's the combination of the seating commission that we will receive, and the risk-based capital that we'll free up as a result of the liabilities transferring the Swiss Re.

And Joan, this is Mark, I'll jump in on the possibility of adverse morbidity swings and CIG. Our intangible assets on CIG's health lines have very substantial margins, so we don't have any concerns with amortization or write-downs related to that block.

So it's really just if you have another quarter of adverse mortality related to the life business, that's what will cause the exaggeration because of the intangible amortization?

Correct.

Right.

Okay. Thank you.

Your next question comes from Tom Gallagher with Credit Suisse.

Thanks, this is actually Craig Siegenthaler. First, I have one on the active life reserve and then one on the investment portfolio. Given that we have now seen a number of claim reserve charges, this trend is actually accelerated, how can we become comfortable with the active life reserve?

Well, and I would go back to -- I hope everyone understands, that we are taking some -- we have taken some extraordinary actions on the claims reserves, using forward-looking approaches to get the $110 million. And we're choosing to take it. I mean, I think you have to start off with that thought. But with respect to the active life reserves I'll pass it over to Mark.

Okay. On the active life reserve, I think the thing that we do each quarter to get comfortable is to update our recoverability analysis, update our projections of future experience, based on the developments in the quarter, and on that basis we see that we have remaining margins in the active life reserves even without taking in to account some of the improvements that we might expect to come in the future.

Does FAS 60 allow you to unlock the assumption? So even you thought some were returning negatively, could you adjust for that? Or do you need a preen deficiency? And also is there a cushion in this number on any type of support for future adverse deviation?

Well, the cushion is provided primarily by the margin. There are certain provisions for adverse deviation in the assumptions as well. But on your prior question, which my mind went just went blank on --

Life reserves.

Yes, FAS 60 --

Yes, FAS 60 does lock in our assumptions unless we have a premium deficiency. There is a -- there is an exception as we implement premium re-rates that are not included in our assumptions, which might result in a perspective change in basis, but not any kind of restatement of existing balances.

Thanks. And then on the investment portfolio, just based on your exposure to 2007 single A which your prime delinquency trends has fared worse than the earlier issues, I was just wondering what your assumed loss is for '07 subprime loans.

Let me get back with you on that. I understand the question you asking. I don't have that in front of me.

Okay. Thanks a lot.

You have a follow-up question from Jukka Lipponen with KBW.

Back to the run-off block, what is your current thinking potentially considering a reinsurance transaction or securitization or some other way to remove that liability from your balance sheet?

Well, we consistently have said that -- with respect to long-term care that we have an over-waiting in long-term care, and it's an unusual waiting for a company of our size and credit rating to have, and at some point we will search out ways to reduce that waiting. We continue to make all of the efforts that John is doing, to improve the performance of the block, because we feel that that's where you have to start first. So I guess, you can -- I'm repeating what I have said before.

That's -- so realistically, when would be -- when could we get to the point where you might be in a position to seriously think about some of those options?

Well, we're continuing to work on improving the block, and I think that's probably all I can say at this point.

Okay. Thank you.

Your next question comes from Eric Berg with Lehman brother.

Thanks very much. I have a couple of questions, once again regarding the closed block. My first question is I'm trying to understand better than I do this idea of forward-looking on the -- sort of taking a proactive step and being more forward-looking on the claim reserve than you have been. The claim reserve, as I understand is, is a known group of claimants. You have true -- presumably you have trued up preserves for this known group of claimants to reflect the fact that you now believe they will be on claim longer than you had believed prior to the increase in reserves. So what do we mean, Jim, by sort of forward-looking and proactively? I'm just not getting it. Since the claim reserve, definitionally is not looking at future claims, it is looking at existing claims.

I think essentially what -- the way you would normally look at it, if you look at the experience you have had -- the historic experience you have had up until now, and if you see a trend that is getting worse, you are taking average over a longer period of time, and if you make it forward-looking, you are taking some of the recent worst numbers and projecting them out is -- is the difference between forward-looking and backward-looking.

Okay. I think I understand.

Yes.

Go ahead.

No, I was just going to say that is the continuance issue of how long will an individual stay on claim and at what benefit level? And so in that way, to Jim's point, we have assumptions going forward that expects people to stay on claim longer at higher levels.

The second question, I have, once again comes back to this active life reserve. I guess just at a very high level, I don't understand how it could be that you have repeatedly increased your claim reserve, saying people will stay on claim longer than we thought. Then you say it again, then you say again, and you are saying as well that the level of payouts per individual per day -- or per month will be higher than you thought. If that's the case for the people who are on claim, doesn't it have to have similar implications for future claims that have not yet arisen, that is to say for the active life reserve? I just don't understand how the claim reserve could be badly deficient to the tune of hundreds of millions of dollars and there's no implication for the active life reserve.

This is Mark again. Of course it does have an implication on the active life reserve, and I think that it gets back to in the presentation of our discussion of the verified level of claims. Today that verified level of claims is higher than what we would have expected a year ago. And that increase in our expectation of those verified claims does have implications for the adequacy of the active life reserve going forward, and so we've reflected that increased level of claim in our -- in our testing of the active life reserve and the insurance intangibles. So I wouldn't say that there's no impact, but the impact is reflected, and, of course, the active life reserves are subject to future -- to future development as well. And continued adverse development on a more global basis may impact our future assumptions to the extent that we determined there's an issue with the active life reserve, but that's not the position we're in today.

Last -- -- go ahead.

Eric, the other two things that I think are important is that with the active life reserve being about three times the size of the claim reserve, and the fact that the active life policyholders are not on claim yet, the interest component is a much bigger factor there as well. And the investment earnings we get and discounting when the time and point where they would go on claim is out into the future as opposed to being on claim now. And then lastly, the premium re-rates have a much more significant impact on the active life book than they would on those on claim, because when they are on claim, their premiums are waived.

Last question, why does it take -- you have said very clearly and more than once that this is a process rather than something that happens, this business -- this matter of fixing the closed block is a process rather than something that happens quickly. If 80% -- my question is this. If 80% of the first round of increases have not only be improved but have been implemented, why don't we see that already in the financials or are we?

This is John Wells here. I can take that one. On the premium re-rate, recall that once we get the re-rate implemented in to the system, it takes a while to be billed. In other words we don't get the increase until the next billing date. And we have about 40% of our policies are on an annual mode. So it could take conceivably several months, up to a year, in fact, to get that rate increase. So that's why we're saying it takes longer for the premium increase to take effect. Now implemented is implementing in the system, and it takes toll at the next billing date.

Thank you.

You have a follow-up question from Tom Gallagher with Credit Suisse.

This is actually Mike Slifirski. I had a quick question. You guys still expect a $10 million run-rate of earnings improvement from better claims management, which I believe you referenced in last quarter's call?

Yes. I think I heard your question. We continue to expect $40 million in run-rate improvements through better claims management; that right.

Okay. Thank you very much.

Operator, I think we have time for one more question.

Your last question comes from David [Hinton] with Boston Partners.

Hi, thanks for taking my question. In talking about the various issues with a lot of your operations and how it is going to take a while for things to be improved, what kind of comes up as a question in my mind is the deferred tax asset and the possibility of that needing to be adjusted. I'm assuming those types of questions have been taking place or maybe we would have heard something. Kind of how are you thinking about the deferred tax asset? Is it under pressure for adjustments given the volatile profitability? Just kind of walk me through some things that we may have to think about over, say, the next six months to a year.

David, this is Ed. We do review our referred tax asset on quarterly basis, and have a much more thorough review at least annually, and there are no significant issues that bring that asset currently into question.

Thank you.

Well great. Well thank you all very much for attending this session. The Conseco is continuing to be focused on the senior middle market in America. It's the fastest-growing market segment in America. We have got a unique sales machine dedicated to this market, whether it's through agents, direct or through brokers, and we're committed to growing this business successfully in the future. Thank you very much.

This concludes today's conference call. You may now disconnect.