CNO Financial Group Inc (CNO) 2007 Q3 法說會逐字稿

Good morning. My name is Valerie and I will be your conference operator today. At this time, I would like to welcome everybody to Conseco's third quarter investors conference 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)

I will now turn the call over to Joe Clark, Conseco's Vice President of Financial Planning and Analysis. Mr. Clark, you may begin your conference.

Thank you. Good morning, and thank you for joining us on Conseco's third quarter earnings conference call. Several key Conseco executives are on the call with presentations today including Jim Prieur, Conseco's Chief Executive Officer; Ed Bonach, Chief Financial Officer; Eric Johnson, Chief Investment Officer; Mark Alberts, Chief Actuary; and John Wells, Senior Vice President of Long-Term Care. Also joining us for question-and-answer session will be Scott Perry, President of Bankers Life; Greg Barinstead, President of Colonial Penn Life; Mike Dubes, President of Conseco Insurance Group; and John Kline, Chief Accounting Officer. During this call, we will be referring to information contained in yesterday's earnings release. You can obtain the release by visiting the Conseco's 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 investors section of our website when in its filed on November 7th. 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 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. And now, I will turn the call over to Conseco's CEO, Jim Prieur. Jim?

Thanks, Joe. Q3 2007 was a very interesting quarter with a lot going on. Overall, we continued to make progress on our plans to position Conseco for future growth. Earnings per share before expenses related to the litigation settlement and the previously announced loss on the annuity block reinsurance was $0.18 per share. This quarter's litigation costs represent the final expense for the R factor settlement. Slide five shows a breakdown of pretax operating earnings by segment. Bankers Life and Colonial Penn's earnings were strong again and you will be provided with more detail on these later in the presentation. Conseco Insurance Group had a rough quarter. They've had two unusual non-recurring items, expenses related to operational savings of $11 million, and it also had an $18.3 million addition to reserves arising from the remediation of past errors. The expenses related to operational savings and consolidation consist of a write-off of software which has been abandoned because we have continued to simplify our business, and costs that are associated with expense savings going forward.

You'll know that Deborah called that we had started a remediation program that is designed to identify all of the reserving issues that could result in future out of period adjustments. In the most recent quarter, this program discovered reserve mistakes made in specified of these reserves. These are mistakes originating at the time the the block was acquired more than a decade ago. We've now fixed those, resulting in an increased to reserves of $18.3 million. Our remediation program is scheduled to be finished by year end. However, our control weakness will not be fully remediate until our redesigned and improved controls have been operating for several quarters after the completion of the remediation procedures. The LTC closed block showed much more stable performance in the quarter with a lot of $2.9 million, although it did benefit from a catchup in terminations during the quarter arising from mortality.

Slide six, overall the company had very strong results from Bankers and Colonial Penn. Six results were negatively affected by the item identified by our remediation procedures as well as by the expenses related to the consolidation of operations and both of these are non-recurring, and the second one will reduce expenses going forward. LTC runoff block is approaching break even as predicted and you will see the improved stability in the results later in this presentation. From a capital perspective, the sale of the annuity block closed in October. We've effectively committed most of the proceeds to recapture the Colonial Penn block of life business. The company also bought back $2.4 million -- sorry, $2.4 million shares of its common stock during the third quarter.

Moving to new business. New business continues to be strong at Bankers and at Colonial Penn. There was some slowdown in the third quarter at Bankers driven in part by the cessation of PFSS sales in the market, however, Bankers did pick up a very large reinsurance relationship with the PFSS product that will add significant amount of premium and profits to our results but does not appear in the sales number itself. Six sales, were down 31% compared to last year. But the value of the new business actually increased, both for the quarter and year-over-year. So while accrued sales measure of NAPP didn't show growth we're adding value to our new sales activity. Our year-to-date annualized operating return on equity excluding litigation charge and the loss of co-insurance transaction from earnings was only 1.6% for the last four quarters ended September 30, 2007 and it's been declining as you see on this chart on a trailing four quarter basis, principally due to the neglect ROE in our runoff segment.

As a reminder, these segment gap ROE calculations are based on the method described in the notes to this slide which start by scribing statutory capital to lines of business based on RBC. The company has a long-term goal of improving its ROE to 11% for 2009, which is achievable. Next up is our CFO, Ed Bonach, will take us through the financials, Ed?

Thanks, Jim. Starting at the third company level, slide nine replicate the earnings stable in the press release. I will be commenting on each operating segment on separate slides. The net loss applicable to common stock for the third quarter was $53.7 million. This included $28.1 million of net realized investment losses or $0.15 per diluted share resulting in an operating loss per diluted share of $0.14 as compared to a $0.35 profit per share in the third quarter of 2006. The current quarter included two adjustments that needed to be understood in comparing these results to expectations and earnings trends.

This quarter's earnings were reduced by $0.26 per diluted share, resulting from the loss related primarily to writing off intangibles pertaining to the annuity business reinsured with Swiss Re. The quarter's results were also reduced $0.06 per share from increased expenses associated with the ultimate settlement of benefits as part of the R factor litigation including the recent sale of shares and lower market prices than previously expected. Adjusted operating expenses for the trailing fourth quarters are down more than $10 million comparing the third quarter of 2007 with the third quarter of 2006. We are on track to achieve our targeted cost reduction of $25 million annually commencing in 2008, resulting from our back office consolidation project.

Additionally, we will save $6 million annually from the rate sizing of sales and marketing, which occurred in the third quarter of 2007 and an additional $2 million from the write-off of the software that Jim mentioned. I will comment further about this when I discuss the business segment. Slide 12, consolidate several of our more important indicators. Book value per diluted share reflecting the conversion of preferred stock in May decreased from year-end to $24.77 reflecting principally the loss during the year. Our debt in preferred stock to total capital ratio calculated excluding accumulative other comprehensive income was just over 20% just the end of the third quarter as compared to about 26% a year earlier and 29% at year-end 2006. Risk based capital led our insurance companies remained very strong, ending the third quarter at approximately 330% based on our preliminary calculations. Net investment income on general account assets for the third quarter reflect the strong earned yield of 5.88%. Investment quality remains high.

Although we have increased our below investment grade position modestly, credit quality is excellent. We have very limited financial exposure to subprime asset-backed security and we significantly reduced our exposure during the quarter. Now comprising less then 6/10th of 1% of our portfolio with most of it highly rated at A or better. Eric Johnson, our Chief Investment Officer will cover this in more detail later. As announced yesterday, we have reached an agreement with Swiss Re to capture a block of Colonial Penn Life business reinsured in 2002 that comprises $50 million in annual life premium income. This meaningful increase -- this meaningful increases our core business, simplified our operations and is creative to earnings and return on equity. The transaction strategically redeployed cash received from the close of our annuity reinsurance transaction. We expect the life insurance recapture to be complete by year-end.

We'll now turn to the segment results beginning with Bankers. Year-to-date sales at Bankers have been driven by strong result in life insurance in private key preserve. Slightly lower earnings in the quarter compared to the third quarter of 2006 was driven by lower Long-Term Care margins mostly offset by improved spreads and higher prescription drug programs private fee for service income. Including the commencement of the reinsurance agreement on a sizeable group sold by Coventry that Jim mentioned. Bankers annualized return on equity improved for the -- over the first half of the year and at that 10.4%. Turn to slide 16, business growth at Bankers is evident in quarterly revenues of almost $622 million, up 18% over the year ago. Bankers result for the third quarter of 2007 improved over this year's first two quarters benefiting from the higher Medicare-related product margins. The Medicare supplement benefit ratio was slightly higher than in the third quarter of 2006, yet the trailing fourth quarter average remains quite stable. Benefit ratios for the PDP and PFSS lines of business reflect the seasonal pattern of plain results and these results are consistent with our pricing expectations.

Turning to slide 19, the Long-Term Care interest adjusted loss ratio has been increasing modestly, impacted in part by higher persistency. Some of the increase has been driven by claim experience which is leading us to rerate some of our business issue at approximately three to five years ago that has not been previously rerated. Moving now to Colonial Penn. Earnings for Colonial Penn in the third quarter of 2007 produced a year-to-date annualized return on equity of 13.8%. Our favorable trends continue at Colonial Penn. Earnings drew 4% over the prior quarter and are 52% better than the third quarter of 2006 due to business growth, expense management, and favorable mortality. Quarterly revenues are up 10% over a year ago. Colonial Penn has consistently demonstrated a capacity for increased lead development which is a key indicator of future sales for a direct marketing organization.

Moving to Conseco Insurance Group or CIG. CIG sales based on new annualized premium was down 31% from the third quarter of 2006 with strong sales gains in specified disease offset by decreases in Medicare supplement annuity assessment and annuity. While CIG sales are down, there is greater focus on more profitable business with the contribution to profit from the new business higher than it was a year ago. Earnings decreased from the year ago period due to adverse mortality on interest sensitive life products, the reserve correction and specified disease identified by our remediation procedure that Jim mentioned and expenses related to consolidation of operations and the right sizing and focusing of sales and marketing into our core distributors of PMA. Independent health distributors and work sites. CIG segment earnings exclude the after-tax charge of $49.7 million related to the closing of the annuity co-insurance transaction. CIG's earrings in the third quarter of 2007 results produced a year-to-date annualized return on equity of 3.7%.

CIG's third quarter pretax operating loss reflects the $18.3 million specified disease reserve corrections, $11 million of consolidation expense charges that will result in expense run rate savings of over $8 million annually going forward and an $11 million reduction in interest sensitive life earnings from adverse mortality. CIG's Medicare supplement benefit ratio was 68.6% in the third quarter of 2007 consistent with expectations. Persistency on this business has been higher at this year versus the prior. CIG's interest adjusted specified disease benefits ratio was 70.3% in the third quarter of this year reflecting the reserve correction. Adjusting for this and other similar items produces a more stable loss pattern as depicted by the solid line on slide 26. Next, we are going to focus on our run-off Long-Term Care block and I'll call first on John Wells, Senior Vice President Long-Term Care for a discussion of our turn around progress. John?

Thanks Ed. Results for the third quarter reflect stability and reserves and improving business fundamentals related to our program for improvement. The results of the turn around program are providing real impacts that are increasingly evident in our results. With regard to rate increases, we are nearing completion of our $35 million rerate program and making steady advances in a second $21 million round of rerates. In the area of claims management, we have implemented many of the major elements of our improvement plan.

Our handling of initial and established claims is significantly improved in comparison to processes in place during 2006. We have implemented service improvements in our intake process, increased accuracy of initial claims decision, expanded the use of case management and plans of care and periodic research of cases of previously-approved claims. The estimated impact of these improvements on third quarter results is $5 million. And we expect these results to accelerate through the end of the year. As discussed on the second quarter call, we are studying a proposal for system and operational solution for a run-off block from a Long-Term Care Group also known as LTCG. LTCG is an industry leader within we are currently also working to implement vest practices and our claims function. We expect to make a decision on this proposal in the fourth quarter of 2007. On the regulatory front, the Long-Term Care industry is currently seeing an increasing amount of interest in these activities.

It is a matter of significant public interest that policyholders receive assurance that the industry makes great efforts to pay eligible claims when they are do and that the state regulatory system is protecting them. To this end, Conseco initiated discussions with State Farmers Insurance earlier this year related to a multi-state examination of our current Long-Term Care claims and management practices. This multi-state exam began on July 9th with over 35 states participating. We look forward to the opportunity to utilize this assessment in our on going improvement efforts in customer service and compliance. Moving to slide 28. We would like to provide some additional updates on the rerate program. As previously mentioned, we are approaching completion of our goal of an estimated $35 million of net revenue enhancement from a first round of rate increases initiated last year. These (inaudible) reflect activity through October 25, 2007. As discussed in the previous call, we have obtained 100% of the $56 million goal and submitted filings to the states for their approvable for this round of rate increases. We have received approvals from the states totaling $37 million. This represents 90% of our $42 million goal. Approvals from a few key states remain in achieving this goal.

We have also completed system and implementations of approved rate increases representing $30 million of enhanced revenue or 86% of our $35 million goal. These rate increases will take effect at the next premium billing date of the related policies. Moving to slide 29. Progress also continues on a second round of rate increases which were initiated in 2007. As of October 25th, we have submitted $31 million in round two rate increase filings to the states for their approval. This represents 72% of our $43 million goal. We have also received approvals from the states totaling $8 million of increases for this second round. And this represents 30% of our $26 million goal. We have also completed systems implementations of approved rate increases representing $5 million of enhanced revenue and this represents 18% of our total goal of $21 million.

In sum up, our turnaround program is making solid progress and we expect these improvements to continue as we exit 2007. And now, Mark Alberts, our Chief Actuary will take us through discussion of the closed blocks financials. Mark?

Thanks, John and good morning. Result for the closed block segment were a loss of $2.9 million in the third quarter, an improvement of $10.1 million from the third quarter of 2006. The earnings trend shows a marked improvement from prior periods, including a $130 million improvement from the second quarter of '07 when we strengthened claim reserves by $110 million. As a result of this strengthening, the third quarter development of prior period incurred claims was very stable, even developing a small redundancy in prior period reserves.

As John noted, results for the quarter also reflect the growing impacts of our improvement initiatives. Results for the quarter also benefit it from the $6.6 million of active life reserve releases further described on the next slide. Incurred claims for the quarter were $112.9 million flat from the third quarter of 2006 and much improved from each of the last three quarters reflecting the stability in the claim reserve. The verified basis incurred claims are $116.2 million and are in line with the prior periods. The favorable change in active life reserve reflects the adjustments discussed earlier, the first is a $20.1 million release of active life reserves related to prior period debts and terminations which were identified in conjunction with our work to remediate our material control weakness. This release was partially offset by an increased of $13.5 million to refine and our active life reserve estimate for certain benefits.

Beginning this quarter, we have also updated our active life reserve assumptions to reflect our rate increase program. As mentioned, in our long-term care conference call in September, our active life reserve assumptions must remain fixed unless the reserve is determined to be an adequate or unless rate increases differ materially from those that are assumed in a case of rate increases, the reserves are changed respectively using a method called the pivot method. Under the pivot method, there's is no one time reserve change, but a portion of the rate increase premium is accrued into the benefit reserve in all future periods. In the third quarter and in future periods, a portion of our rate increase premium is added to the active life reserves, which will favorably impact the margin in those reserves going forward.

On slide 33, the third quarter interest adjusted benefit ratio of 75.1% demonstrated our progress in improving the business fundmental and also reflects the favorable impact of our active life reserve changes. Slide 34, demonstrates the stability in our reserve balances in the current quarter. On slide 35, which was introduced in our Long-Term Care conference call, in late September, this slide is a bit busy, but clearly demonstrates the improvement in stability of claim results this quarter. The prior year period development in the quarter is a positive $3.3 million compared with the deficiencies that arose in previous periods. If we compared the 06-30-07 and 09-30-07 verified claim rows on this page, we see the stability and the incurred claim estimate for each incural period column. Prior to this quarter, those estimates of prior period claims had been consistently increasing. The open claim count and policy trends continue to run in line with expectations. The increase in termination rates this quarter is due to the prior year period debts and terminations we already discusses and now I'll hand it over to Eric Johnson, our Chief Investment Officer who will discuss the CNO investment portfolio, Eric?

Thank you, Mark and good morning, everyone. As Ed mentioned earlier, investment income for the quarter increased at $389.9 million representing an earn yield of 5.88% up from 5.72%. In the third quarter of 2006. We've been able to increase portfolio yields despite the low rate environment by shifting out occur some (inaudible) has incurred as well as to increase allocations through two private placements and commercial mortgages. Asset quality remains a high priority. Our below investment grade ratio remains satisfactory with some upward drift due to LBO rating in migration, low investment grate securities represent approximately 5.5% of journal account assets. This is a highly diversified portfolio which receives careful attention.

Moving to slide 38, slide 38 summarizes our structured securities portfolio. This is a very highly rated portfolio over 87% in the AAA category. It's about 50% agencies. Obviously, involving basic risks related to volatility and prepayments as well as credit and the other 50%. Our subprime holdings are included in the ABS segments on this page.

Moving to slide 39. Slide 39 summarizes our subprime vintages. During the third quarter, we materially reduced our subprime exposure with greatest emphasis on 2006 and 2007 vintages. We continue to evaluate deal level performance based on a range of projected macroeconomic conditions. While we were satisfied that our entire portfolio has sufficient embedded coverage of projected losses, we wanted to increase our margin for first development and error.

Slide 40 summarizes our subprime portfolio in market-to-market by rating. You're all aware of the very substantial recent volatility in the market for subprime securities. Because we've been fairly active transactionally, our remaining loss exposure is less than might otherwise be expected. A slide 40 shows, subprime securities represent only .57% of our total portfolio, approximately $180 million at book value. We'll all remember that at the end of the second quarter, it was over $300 million.

Moving to slide 41, recognizing this is and will remain a most valuable market we'll continue to exercise rate analytic figure. While Moody's and SNV recently downgraded in excess 40 billion in securities we had a total of for holdings downgraded. We do not own any ABS CDO investments or any hedge fund investments. And with that, I will turn it back to Jim Prieur.

Thanks, Eric. To summarize, Bankers Life and Colonial Penn have continued to have great results. They're focused on growth. CIG is now much more focused on its distinctive capabilities. It's focused on its PMA distribution system, health products distribution, and work site. While sales at CIG have declined the economic value of these sales is actually improved over the last year. And some of the expenses incurred during the quarter will produce on going operating savings going forward. We've been seeing for some time that fixing the run-off block would take quarters not weeks or months. It's now been achieve quarters and the results are becoming more visible. The claims preserve volatility has been reduced. Rerates have continued to come through, and there's been improvement in claims management. We expected this block will be profitable next year. We've changed some of the pieces of the portfolio of businesses that we own.

In this quarter, we closed the sale of the annuity block to Swiss Re and just announced that we're recapturing the Colonial Penn block that the company had reinsurance about five years ago. In doing that, we are shedding a lower turn old out of during the charge period annuity block and volume back of block that is part of our core business. From a portfolio capital management prospective, we also bought back $34 million of stock during the quarter. On the operation side, most of our organizational changes have been completed. Over the summer, customer service has been effectively moved to Carmel and than move was done relatively smoothly. We still have the real estate changes to make. We actually have to do the physical move in Chicago before we can recognize a loss, and this will happen in the first quarter of 2008. The annual expenses are related to the operation consolidation which was originally estimated to be $25 million will now exceed $30 million. And now, I think we will open it up for questions. Operator?

OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q-And-A roster. Your first question comes from Tom Gallagher with Credit Suisse.

Good morning. First question is on CIG. How should we think about this business in the context of -- I think it's pretty clear that your core best quality operations are Bankers and Colonial Penn and CIG seems to be, you know, showing pretty high levels of deterioration over the last several quarters. Is this a business that eventually gets put in runoff or how do think about this business strategically?

Thanks Tom, thanks for question. I mean it is clear the Bankers Life and Colonial Penn have got, you know, very strong competitive position in their respective markets. In the case of CIG, the underlying business of CIG is, I believe, quite strong. It's just that our competitive edges have got to be continued to be sharp and they're focused on a couple of areas, smaller areas. So PMA distribution, health products distribution, and we believe work site longer term. Being sort of a general competitor in the independent distribution, annuity and life market is not a place where CIG has got any competitive advantage at all. The other thing to recognize is that the value of new business has been increasing on the CIG business overall. So, while the gross sales number looks pretty disappointing, in terms of the incremental value from new sales, it's actually going up and I think that, you know, this business focused on the areas where we have a competitive edge can do very well going forward. The -- obviously, the deterioration in the life earnings has been a disappointment and you'll note that we haven't talked about that as being a non-recurring event. You know, we have some vulnerability there going forward.

Okay. And two other questions. One is can you talk about how much of the earnings in the runoff business -- in the runoff LTC block benefited from reserve releases that you put up last quarter because. Because, I believe the assumption that you had embedded last quarter in the reserve charge had contemplated some level of deterioration and it doesn't look like we've got deterioration this quarter.

Tom, this is Ed Bonach. The reserves that we strengthened in the second quarter, we did not release any of those reserves. So in essence maintained that margin and actually added to it by the positive loss development that was noted of $3.3 million.

Okay. So that's still out there as a potential cushion, if you do have some deterioration?

That's correct?

Okay. And then last question. When you talk about the 11% '09 ROE goal, can you just remind us what exact book value you're using that to calculate of?

Sure. What we're using is the actual book value per share less the NOL. So the NOL portion of the book the value and the reason we do that is the NOL is a funny number. And It's a gap number but it's an undiscounted number that, you know, in the fullness of time, should get used up by our not paying taxes over time. So, it's book value less the current book value of what the NOL is.

And those numbers, I believe are what? Starting roughly 25 and as the DTA that we then need to deduct is that $7 to $8.

Is book $7. Excuse me.

Okay. So we're talking about a book value right now starting at 18 and presumably when you forecast ROE that's going to grow to some level by the beginning of '09?

That's right. Yes. I mean, because the other crazy thing about the NOL is that as we starting to make more money. The NOL could grow a bit from where, it currently is, which will have the perverse effect of making the E on the ROE calculation go up temporarily. So, what we're really looking for is a better E, which is why we're taking off the NOL.

Sorry, last question for me, Jim. Do you think legitimately there's $2 of earnings power underneath everything that's going on right now?

Yes.

Okay, thanks.

Your next question comes from Nigel Dally with Morgan Stanley.

Great. Thank you. Good morning. First, because of the remediation procedures. It seems like it facilitating in sizeable charges every quarter. How far through this remediation process are you? Is it now mostly complete or is still the risk of further sizeable charges looking forward. That's first. Second with subprime. I understand, you reduced the exposure but your market value of subprime versus book at 82% looks pretty low at least (inaudible). If your intention to hold those remaining securities to maturity or should we expect further sales looking forward. Third question on the rating agencies. How important is it for the company to get an upgrade, how does this does impact your outlook for stock buybacks looking forward? Thanks.

Nigel, this is Ed. I'll start with addressing the remediation. We are approximately halfway through the whole remediation process and to give you better understanding of this. We are going through over 2,000 different plan codes in our businesses of specified disease, Long-Term Care and life insurance. And we are tracing those policies or selection of policies from those planned codes from the original application to the valuation system to make sure that the actuarial reserves are appropriately calculated.

Those planned codes represent over 80% of our total reserves. So in that, they're not each at 50%. For example, specified disease we're about two- thirds of the way through that and the way that GAAP requires us to account for this is to recognize these adjustments in the period we find them, even though we don't expect the full remediation process to be completed until the end of the fourth quarter of this year.

On the subprime, maybe Eric can answer the question?

Sure. With respect to the roughly $180 million book value at 09-30, we've fully expect that amount to be recoverable with a solid margin for adverse development and, you know, while it's possible that some minor amount of transactions could occur, we couldn't expect anything along the scale of the last quarter. I think in general, you know, the market to book on that is very moderate in the context of the current market and I think, but one look at the recent price transaction and, you know, even the 2006 and 2007ABX index is -- it would rather be, you know, very higher end of that spectrum.

And, with respect to the question about rating agencies, I mean, I would like it to be very clear that our long-term goal is to improve our ratings. You know, we are, you know, keeping our capital structure at the levels that A-rated company would have and so, we anticipate that as we bring or continued to improve the Long-Term Care block and produce more stable results that, you know, eventually, we're going to get rating improvements. While it isn't particularly important to us in the short run -- doesn't seem to have very much of an impact on sales. Nevertheless, being the only below investment grade significant insurance company in America, it does make us feel sort of lonely, and so, you know, we are going to be aiming to improve our current ratings over time.

And what is that, with regards to that goal? What does that mean for capital management? Are you likely to hold increasing amounts of capital to try to accomplish that goal or -- purely a function of improving the operating trends.

I mean Nigel our problem hasn't been our capital structure. Our problem has been our earnings. And so, in both of stability of earnings and the quantity of earnings and so we're going to be focused on that and, you know, so that's going to be guarding us as we move forward. I mean, I've made the point before that most of our business is not rating sensitive but nevertheless, you know, longer term, we would be aiming to get a higher credit rating.

Great. Hey guys thanks a lot.

Your next question comes from Jukka Lipponen with KBW.

Good morning, first question, what are the age and recruiting and retention trends at Bankers Life and what is the agent count as of year-end '06 versus now?

Actually, I don't have the exact number but it's around 4500 agents at the end of the quarter, and we're up 5.5% since the beginning of the year.

And the recent trend the downgrade impacting. Are you losing agents to others?

The net figure is continued growth. The growth has been fairly steady throughout the whole year and, that being said, you know, there are always some noise in the channel and we do lose people to other companies and we take people from other companies. The overall impact is that we're continuing to grow the agency forward.

Thanks. When do expect the second round of rerate approvals to be completed?

Second round? This is John Wells. Actually, the filings have started and consistent with the last, you know, round of filings, they are already started to come in. Of course, the implementation will be, you know, on the next as we put them in the system in the next billing date of the associated policies.

So they are started to come in slowly, and if you take a look at last year's trends, even though the projected net revenue enhancement's is going to be down because the book is enforce, premium is down. You'll see the trend is about the same. Follow the last round.

And lastly, did I hear you say that you have some kind of a new relationship for the PFSS business at Bankers?

Bankers is reinsuring some business that Coventry is doing in PFSS and so it's a Coventry Group contract and so it's a fairly significant amount of volume which, you know, have an impact on profitability. Actually, we've an impact in Q3.

This is something new incremental to your relationship with the Coventry previously.

That's right.

Okay. Thank you.

Your next question comes from Joan Zief with Goldman Sachs.

Hi, I have two questions and I'm sorry I didn't hear the last question. So in case I'm asking the exact same question, I apologize. All right, so my first question is on Bankers. Can you just review the product focus there. Is how you think the business is what it might be shifting, and whether that will shift margins that we should be thinking about, and then the other question has to do with the charge related to the annuity reinsurance. And I just wanted to understand if that was similar to the press release. Did that $76 million charge include the reversal of the earnings out of the first half of the year as well. So, I just want to make sure that I understand if there was anything different from what was announce previously.

Okay. With respect -- It's Jim again. With respect to Bankers and the product focus. You know, there is always come shift of product depending on market conditions. And, so, you know, life sales have been much stronger. Annuity sales have been weaker. You know, during the third quarter, PFSS sales were sort of on hold, basically. Other then that one group contract, and Med Supp sales for the quarter were up a little bit in part because PFSS sales were down.

So, there's no huge shift in the product mix, although in the margin there's always shifts, but driven mostly by market conditions and like annuities it depends upon where CD rates are and with the increased volatility, equity index annuities are more expensive for the consumer because if they're basically having to pay for the volatility in the option market that we're passing onto them. And, with respect to the sale of the annuity block, you can trace it all back to the original number and in fact, we'll have it schedule in the Q that will do that exactly quarter to quarter for you and it's all consistent and, you know, it was $65 million loss plus the profits on the blocks since January 1st and some of that was effectively taken in earlier quarters, which is why the numbers, you know, might have been appear different but you'll be able to see it all.

Okay, and just going back to the Bankers' product. So, there's no plan by management to focus on one particular product versus another at this point and time. Whatever gets sold, gets sold.

Well, pretty much, you know, sometimes we might run specials on one product versus another but there hasn't been no shift. Mostly shift has been, a shift in the part of the consumers between the product offerings, so we offer them and, you know, that's just the regular kind of shift you see from time to time in the marketplace.

Jim, this is Scott. I can add a little bit to that, Joan. As you know that the Bankers' channel is a market-focused company so we offer the suite of products to our market. The key to that is that we appropriately price and that the margins are all relatively equal and that's what we focus on. So, as product sales do shift given the market conditions on a profitability basis we're somewhat whole.

Thank you.

Your next question comes from Josh Smith with CREF.

Thanks, Joan, pretty much asked it on the annuity deal. Can you just give a little more color on the benefits of this deal. You're taking a $76 million loss which is consistent with what you said earlier and it's freeing up a couple hundred million of capital. Is that the basic benefit of doing this deal?

Josh, this is Ed. The basic benefits are to free up capital from a lower returning business. It was returning about 6% and to redeploy that into higher returning core businesses and taking the vast majority of the seating commission to recapture the Colonial Penn Life business is a perfect example of that redeployment into a core business with higher profitability.

Great. Thanks.

Your next question comes from Randy Bander of Friedman, Billings, Ramsey.

Hi everyone. Thanks. Just want to dig into CIG a little more. Jim, you had mentioned that, you know, the annuity and life sales through independent distribution was not really competitive advantage. So just to kind of put numbers around it, that would be roughly, I think 38% of CIG's business. What percentage of PMA's distribution incorporates those products and how big a share of that overall is distributed by PMA?

The PMA business is selling supplemental health or specified disease and, you know, they're selling in rural America and they will sell life and annuity products on occasion but it's really sort of -- like an incremental sale. They're real focus is on the supplemental health side of the business.

Okay, and so what percentage of the overall CIG distribution does PMA represent?

It's over 40% now.

Okay. And then is there independent agent distribution in those products outside of that 40%.

Yes there is. That's the health IMOs and the health IMOs are a significant part of the company's sales and have been, you know, forever, I guess. Pretty much.

Okay. And so in that, the outlook for that is good as well. So, I'm just trying to figure out what percent of CIG distribution still falls and I guess the good basket versus --

Well, and there are still some life and health distributors who have, you know, good relationships with us who sell the product and we're quite happy to sell the product. We'll continue to develop the product. It's just we're not going to be focused as much on that side of the business. What we found was basically our marketing expenses were disproportionately weighted to annuity and life sales, and, you know, we're not sure how much more the sales will go down, even though we've cut back substantially on the amount of marketing expense that we have within CIG.

So, this is really an attempt to focus on within CIG, those parts of the business where we have a clear competitive advantage either because we've been in the marketplace forever, because we're known as a good manufacturer, or we have, you know, long-standing distribution relationships that we can take advantage of?

Great, thanks and just one other clarification on CIG. The remediation there is that $8 million annual expense savings that are expected?

No, the remediation is the discovery of the $18.3 million additional reserve, and it is the $11 million of what we call related to consolidation that $11 million expense will generate more -- well, will -- is the acceleration of things which will create over $8 million of savings per year for the next few years.

Okay. Great, and so we could expect that for full year '08 in CIG.

Yes.

Great. And then one another quick question on Bankers. Is there any sensitivity to recruiting to a softer economic environment, meaning that if general and employment increases you may find it easier to recruit agents?

I'll pass that to Scott.

Sure. There is some correlation and it really varies regionally, but in the past where we have had a softer job market, we find that the pool of recruits is larger and allows us to, you know, select a higher caliber of recruit.

Okay. Great, thank you.

Again, ladies and gentlemen. To ask a question, please press star one on your telephone keypad. Your next question comes from Mark Finkelstein with (FPK).

Hey, good morning. If you've already addressed this I will come back and look at the transcript. I was just curious with the rate increases at Bankers in the Long-Term Care, the rerate process? How do you expect that to influence Bankers' sales going forward, and I guess we were at negative 2% for the quarter, what would be the expectations as the rerate process continues?

I'll pass that onto Scott.

Sure, hey, Mark, on the rate increases, because we were pretty much at -- round one was continually through '06. And that probably had the biggest impact because it was the largest portion of our business. The second round, I think will, although it will create somewhat of a distraction as the rate increase is implemented in the particular state because agents will be focused on securing that business and retaining the business. It will have a slight impact on their focus on new sales, but I don't think nearly a significant as round one did just because it's a smaller block, and the timing will be -- it will be rolled out. So, the impact, it will probably have a minimal impact on our numbers. A slight impact on Long-Term Care sales and I think we saw maybe just a little bit of that in the third quarter.

But because we have over the last three years become less dependent on Long-Term Care sales and we've diversified our product line and as Jim mentioned the emphasis in the increase improvement in life sales, the introduction of PFSS and obviously we're in open enrollment period now and we will be in for the entire fourth quarter and first quarter. I think it will have a minimal impact on new sales.

Okay, and then, again I will go back -- if you talked about that already, but, can you just talk about trends in aging growth.

Sure. Real quick, it's Jim did mention. We're up about 5% year-over-year and a year-to-date basis in total agent size but a more significant number is our productive agent count is up over 15% year-over-year from about 1700 to close to 2000 and those are the percentage of agents or the number of agents within the 4500 that are pretty seen for more -- making for more sales in any given month.

Okay. Thank you.

Again, to ask a question, please press star one. There are no further questions at this time.

Well, thank you operator and thanks to everyone on the call for your interest in Canseco and to the questions. Conseco is focused on the senior middle-market in America. The (inaudible) is going major segment in the market. We have the unique sales machine, dedicated to market with their durations, directed to brokers and we're committed to run this business successfully in the future. Thank you very much.

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