CNO Financial Group Inc (CNO) 2007 Q4 法說會逐字稿

Good morning. My name is Janet, and I will be your conference operator today. At this time I would like to welcome everyone to the fourth-quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS).

Thank you. Mr. Galovic, you may begin your conference.

Good morning and thank you for joining us on Conseco's fourth-quarter 2007 earnings conference call. Today's presentation will include remarks from Jim Prieur, Conseco's CEO, and Ed Bonach, Chief Financial Officer. Also joining us for our question-and-answer session will be several key Conseco executives -- Scott Perry, President of Bankers Life; John Wells, Senior VP of Long-Term Care; Eric Johnson, Chief Investment Officer; Greg Barstead, President of Colonial Penn Life; Dan Bardin, President of Conseco Insurance Group; Mark Alberts, Chief Actuary, and John Kline, our Chief Accounting Officer.

During this call we will be referring to information contained in yesterday's press release. You can obtain the release by visiting the Company News section of our website at www.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 filed in a Form 8-K this morning. The 10-K, which was filed last Friday, is also available through the Investors section of our website.

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 press release and our 10-K 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.

In addition for your reference, we have added a section in front of the appendix which will include slides that were carried over from our preliminary fourth-quarter results call on March 17.

And now I will turn the call over to Conseco's CEO, Jim Prieur. Jim?

Thanks, Scott. As we indicated on our March 17 call, the fourth quarter was an interesting quarter with a lot going on. We will not be repeating a lot of the detailed information that we shared on our call of March 17, but I did want to take a few minutes to address some of the issues that have been on the minds of investors and analysts since that call.

Ed Bonach, our CFO, will cover additional detail on overall results and on the segment results in a few minutes.

Net loss before realized losses and taxes for the fourth quarter and for the full year 2007 were improved from the preliminary results and were in line with what we had indicated for the expected range.

The reported net loss applicable to common stock for 2007 was $194 million compared to the $210.1 million estimated by the Company in its preliminary results. The reported net loss applicable to common stock for the fourth quarter was $71.5 million compared to the earlier estimate of $72.2 million.

The reported loss before realized losses and taxes was $53.3 million for 2007 compared to $78.6 million estimated by the Company in its preliminary results. The reported income before realized losses and taxes for the fourth quarter of 2007 was $33.8 million compared to the earlier estimate of $32.5 million.

The impact of the accounting for LTC premium rate increases and future loss reserves, FLR, versus the pivoted LTC reserves will be discussed a little later in the presentation by Ed Bonach.

We continue to evaluate the deployment of capital. Although there are those in the street who say we need to be more aggressive with stock buybacks, there's also a contingent that says there's concern with liquidity and capital levels. We will continue to be opportunistic about stock buybacks, but we also realize that maintaining the appropriate liquidity and capital levels is extremely important to our business, particularly in this market, as is considering the other uses of capital.

As we've said before, we will continue to manage both of these issues with respect to our goal of increasing the intrinsic value of the Company and the stock. We will provide some more detail on this later in the presentation.

I would like to reiterate that overall we do continue to make progress on our plans for future growth and profits at Conseco. New business and underlying results at both Bankers Life and at Colonial Penn continue to be strong, and the expected future margins related to new business at Conseco Insurance Group increased despite declining sales. Asset quality remains a high-priority, and our portfolio continues to perform within expectations.

We are also moving forward with our strategy to further stabilize our Long-Term Care closed block of business. I will again provide some brief highlights of our results and related progress at the end of this call.

Next up is our CFO, Ed Bonach, who will take us through our financial data. Ed?

Thanks, Jim. Let me start with slide six by covering fourth-quarter 2007 results. Pretax results were in line with preliminary figures presented in our call on March 17 with the Long-Term Care runoff block loss improving by $1.3 million.

Overall the Company had very strong underlying results from Bankers and Colonial Penn. Bankers pretax profit of $58.3 million is consistent with expectations. The fourth quarter was negatively impacted by $11 million of hedging inefficiencies related to our equity-indexed annuity business. Colonial Penn's underlying business results for the fourth quarter were affected negatively as a result of the $8.4 million charge for expenses related to efforts to expand the brand into the private fee for service or PFFS markets.

Earnings excluding the brand extension are up 52% over the fourth quarter of 2006, reflecting overall growth in the business, including the recapture of the previously reinsured book of business from Swiss Re.

(inaudible) our Conseco Insurance Group's results were negatively affected by a few items as well during the quarter. The segment experienced negative adjustments of $14.8 million related to an unlocking adjustment on the interest-sensitive life portion of the business and $8 million from increased benefit ratios for Medicare supplements and specified disease, which do fluctuate from quarter-over-quarter.

We also experienced the negative adjustment of $4.2 million related to losses and the termination of some interest rate swaps. Additionally excess expenses of $3 million were incurred during the quarter related to consolidation of operation. This effort will reduce expenses going forward with about a two-year payback.

The LTC runoff block is continuing to approach breakeven as predicted, and we continue to improve its stability. In addition to the two round of rerates that we talked about in our earlier calls, we will also be seeking additional rerates on the Long-Term Care runoff block. The net loss applicable to common stock for the fourth quarter was $71.5 million or $0.38 per diluted share. This includes $23 million of net realized investment losses or $0.12 per diluted share and $68 million or $0.37 per diluted share for the increase to the valuation allowance for deferred tax assets.

As you can see, the pretax loss for the quarter was $1.6 million or essentially a breakeven quarter as we had previously disclosed. Earnings before net realized investment losses and valuation allowance for deferred tax assets was $19.5 million or $0.11 per diluted share.

Again, I want to point out that the current quarter included adjustments that need to be understood in comparing these results to expectations and earnings trends. Detail on these adjustments is provided later in this presentation.

Turning now to slide seven, for the full-year 2007, the net loss applicable to common stock was $194 million, which includes $77.8 million of net realized investment losses and $68 million for the increase to the valuation allowance for deferred tax assets. This equates to a loss of $1.12 per diluted share.

Our net operating income before refinements to the R-Factor litigation settlement, a third-quarter 2007 charge related to the annuity coinsurance transaction and the fourth quarter 2007 increase to the valuation allowance for deferred tax assets was $43.4 million or $0.25 per diluted share.

Bankers Life's full-year pretax operating earnings were $241.8 million or $8.8 million higher than our preliminary results, reflecting the impact of reversing the pivoted long-term care reserve and replacing them with future loss reserves. The return on equity or ROE for Bankers Life before realized investment gains or losses was 10.2% for the year.

Again, Colonial Penn's full-year earnings included expensing $8.4 million for the expansion of their brand into the private fee for service markets. This also depressed their ROE to 8.9% for the year. And, as I mentioned, Conseco Insurance Group's results were impacted by various items during the year.

CIG's ROE for 2007 was 2.2%. The LTC closed block's pretax operating loss of $185.9 million includes our $110 million reserve strengthening in the second quarter of 2007, plus $22 million of reserve strengthening in the first quarter of 2007. This segment's results improved by $16.5 million from the preliminary results due to the LTC reserving changes mentioned also for Bankers.

Slide eight shows the impact that the restatement had on income and earnings per share amounts for the four quarters of 2006, the full-year 2006 and the first three quarters of 2007. The restatement impact was in line with our expectations in previous communications, increasing 2006 operating income per diluted share by $0.07 to $0.61, and net income per diluted share also increased by $0.07 to $0.45 per share.

Slide nine shows the major restatement items which reconcile from the EPS amount as originally reported and now also as restated. As you can see, the full-year 2006 impact was to increase income before income taxes by $14.9 million and increase 2006 net income by $9.5 million.

The combined impact from restatements due to our remediation procedure, accounting for Long-Term Care premium rate increases also known as future loss reserves instead of pivoted LTC reserves, and previously identified errors had the impact on shareholders equity at December 31, 2006 and September 30, 2007 that were within our expected ranges.

Year-end 2006 shareholders equity was reduced by $13 million or less then 3/10 of 1% or 0.28% to be precise. Shareholders equity at September 30, 2007 was reduced by $18.2 million or 0.42%.

Turning now to slide 11, our year-to-date annualized operating return on equity, excluding the litigation charge and loss on coinsurance transaction from our earnings, was a negative 3.1% for the last four quarters ended December 31, 2007 and has been declining on a trailing fourth-quarter basis principally due to losses in our runoff segment, which includes the before mentioned $132 million of reserve strengthening in the year.

As a reminder, these segment GAAP ROE calculations are based on the method described in the notes to this slide, which start by ascribing statutory capital to lines of business based on statutory risk-based capital.

Our long-term goal is to improve our ROE on an operating basis to 11% in 2009.

The net loss applicable to common stockholder stock for the fourth quarter was $71.5 million. This included $23 million of net realized investment losses or $0.12 per diluted share, resulting in an operating loss per diluted share of $0.26 as compared to a $0.10 profit per share in the fourth quarter of 2006. Again, the current quarter included adjustments and needs to be understood in comparing these results to expectations and earnings trends.

Turning now to slide 13, adjusted operating expenses for the trailing four quarters are down by $2.1 million comparing the fourth quarter of 2007 with the fourth quarter of 2006. The improvement would have been $10.5 million, excluding the brand extension of Colonial Penn into PFFS. We are on track to achieve our targeted cost reduction of $25 million annually resulting from our backoffice consolidation projects.

Additionally we will save $6 million annually from the rightsizing of CIG's sales and marketing, which occurred in the third quarter of 2007.

Slide 14 consolidates several of our more important indicators. Book value per diluted share reflecting the conversion of the preferred stock in May of 2007 decreased from year-end 2006 to $24.41, reflecting principally the loss during the year. Our debt in preferred stock to total capital ratio calculated excluding the accumulated other comprehensive income was just over 21% at the end of 2007 as compared to about 29% restated at year-end 2006.

Risk-based capital with our insurance companies remains very strong, ending the year at 296%. The decline for the year can primarily be attributed to our long-term care reserve strengthening, costs related to the R-Factor litigation settlement and net capital losses. Net investment income on general account assets for the fourth quarter reflects earned yield of 5.95%.

Investment quality remains high. We had very limited financial exposure to subprime asset-backed securities, and we reduced our exposure further during the quarter, now comprising about 0.5% of our portfolio.

Turning now to slide 15, as Jim indicated earlier, we realized that maintaining the appropriate liquidity and capital level is extremely important to our business as is considering other uses of capital. Our liquidity remains strong with over $90 million at the holding company at year-end 2007, plus an untapped $80 million revolver.

Here on slide 15, you will see the major sources and uses of cash at the holding company. This excludes any dividends from insurance subsidiaries. The main nondividend sources of liquidity at the holding company are fees in excess of our costs for investment in management services provided to the subsidiaries and interest received on surplus notes from some of our insurance companies. The primary uses of cash at the holding company are holding company operating expenses and interest payments on debt. The interest payments on debt are 200 basis points above LIBOR, which has been declining reducing the payments by approximately $4 million in the first quarter of 2008.

Also, liquidity at the holding company is impacted by the strength of our insurance subsidiary. Our insurance companies generate approximately $150 million of statutory profits annually, excluding extraordinary items. This is in excess of their capital needs to support their ongoing growth.

And with that, I will turn it back to Jim. Jim?

Thanks, Ed. Slide 16 again highlights the impact of several large factors on the fourth-quarter earnings in each segment. The table suggests earnings power of more than $0.25 per share per quarter.

Again, that is before the impact of real estate savings, some additional operations consolidation benefits, further claims improvements and the ongoing positive impact from the rerates.

To summarize, Bankers Life and Colonial Penn have continued to have great results. They are focused on growth. CIG is now much more focused on its distinctive capabilities. It is focused on its TMA distribution system, health products distribution and work site.

While sales at CIG have declined, the economic value of those sales has actually improved over the last year, and some of the expenses incurred during the quarter will produce ongoing operating savings going forward. We have been saying for some time that fixing the LTC close block will take quarters, not weeks or months. It has now been a few quarters, and the results are becoming more visible.

The claims reserve volatility has been reduced. Rerates have continued to come through, and there have been improvements in claims management. We expect the block will be breakeven this year.

We are changing the portfolios of the business. In the third quarter, we closed the sale of the annuity block to Swiss Re, and in the fourth quarter, we recaptured the Colonial Penn block that the Company had reinsured about five years ago. In doing that, we have shed an old low return annuity block and bought back a block that is a part of our core business.

From a portfolio capital management perspective, we also bought back about 1.7 million shares of stock during the fourth quarter.

On the operations side, most of the organizational changes have been completed. We still have the Chicago real estate consolidation changes to make. We actually have to complete the physical move in Chicago before we can recognize the loss, and that is anticipated to happen in the second quarter of 2008.

We continue to expect that the onetime charge related to the Chicago move will be about $15 million and that the move will reduce annual expenses going forward by about $5 million per year.

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

(OPERATOR INSTRUCTIONS). Nigel Dally, Morgan Stanley.

The first question, the $90 million of holding company liquidity at year-end, is it fair to say that liquidity declined significantly in February after you paid the additional $56 million in Conseco Senior Health?

It declined to some extent because of that, but we also did have dividends in the year from the insurance companies as well that is not depicted in that slide.

Okay. And so looking at the free cash flow, we should exclude the subsidiary dividend. What is the reasonable range of dividends that we should expect for 2008?

I would say somewhere between 50 and $100 million of statutory dividends is what should be expected.

Okay. And of the total cash flows coming in, is there a risk that a sizable portion of those cash flows will be absorbed by further contributions to Conseco Senior Health? It seemed like from your discussions in the 10-K, it looked like the risk-based capital ratio was right on the edge of triggering regulatory action.

First of all, with Conseco Senior Health, we have been operating that entity about at the same capital levels for some time. To the extent that the results continued to stabilize as the last two quarters have, that would significantly reduce the need to have to contribute additional capital to Conseco Senior Health.

That said, on a statutory basis, because there we are actually pivoting our statutory reserves to higher levels, there is approximately a $25 million difference between the GAAP results and the statutory results which could require some additional funding.

Okay. Then the last question was I guess on the hedging cost that you had in Bankers Life. What went wrong to trigger those expenses, and given the (inaudible) market volatility in the first quarter, could this continue to be an issue for this year?

It should not be a major ongoing issue. And what this loss is from is that we at times are overhedged, and in that case we were in the fourth quarter, and with that over-hedged position, the hedges had a cost to us of $11 million. And we do rebalance how many hedges we have, but we certainly guard against being under-hedged and would rather if we had to be over-hedged.

Jukka Lipponen, KBW.

Jim, based on your comments, is it reasonable to expect that starting I guess with the first quarter '08 that we should expect you to report sort of cleaner results without so many items, excluding obviously the real estate charge that will be expected in the second quarter?

That is certainly our expectation.

And going back to the Conseco Senior Health on the previous call, you had said that you expected on a statutory basis annual additional reserve increases of 50 to $55 million per year is I think what you had said. And so when I look at the numbers, is that a number that I should compare to the reserve increase that you had in Conseco Senior Health in 2007 of about $185 million?

That is correct that the pivoting is approximately an additional 50 to $55 million for Conseco Senior on a statutory basis. And that is a fair number to compare to the $185 million.

And on a statutory basis, the channel expenses in Conseco Senior Health came down by about $10 million in 2007. Should we expect further declines on a statutory basis or not?

You know, yes, and we continue to benefit in all of our segments from the consolidation of the backoffice, and we continue to seek other ways to bring down expenses.

And in terms of the surplus note interest payments out of the subsidiaries and the service fee payments, do you need regulatory approval for those, or can you pay them without prior approval?

They are paid without prior approval. The whole note once it was established was subject to regulatory approval, but then the payments in subsequent periods just carry on without additional approval.

And last question. Jim, you have indicated that you all along at some point you want to reduce Conseco's exposure to Long-Term Care. How should we think about the timing of a potential transaction at this point?

Well, I think the business is in much better shape than it was before, but I would not want to create any expectations about timing.

Randy Binner, Friedman, Billings, Ramsey.

I was wondering if we could go into the EIA, the equity-indexed annuity hedging issue a little bit more so we can try and understand that.

When you say you were over hedged, can you explain how you were over hedged? I guess maybe how market volatility is measured by the [VIC's] might be an input to that, as well as the performance of the S&P overall.

Yes, I'm going to turn it over to Eric Johnson, our Chief Investment Officer. He deals with this on a day to day basis.

I will take a step back and explain how the transactions originate and then trace it through, and I think that will help put it in context for you.

When the Company sells equity-indexed annuities, which obviously have a pay off to the policyholder based on changes in the value of an index, in order to hedge that exposure, we purchased similar options be they on the S&P or it could be on Russell or any number of indexes that would mirror that payoff characteristic.

To the extent that in the intervening time, these will tend to be one-year options. To the extent that during the intervening time after the asset and the liability have been established, there may be changes to the liability values that will come from lapses or other reductions in the options sold. We may from time to time find ourselves with what we call an over-hedge, meaning a remaining long position that is not offset by a short position.

I will tell you that in 2006 we benefited from an excess long position by about 8 to $10 million and the rising market being obviously long to make money. In the fourth quarter to the extent that we basally had declining option values, that residual net long position basically gave back that money that had been accrued -- earned in earlier periods.

Now obviously volatility is one factor in the valuation of that book, but it is not the only one. Overall index levels remain in term interest rates, and there are a variety of factors that play into that net value. Obviously to the extent we are long in the absence of any other factors, increasing volatility will increase that value.

Having said that, during the first quarter of this year, you have lower index levels overall, and that would go the other direction.

The goal here is not to speculate on but to basically match our liabilities sold with an asset and them make the insurance spread between the two. Over a long period of time that will tend to be the case. From quarter or quarter, there is noise. The $11 million is more noise than one typically sees in a quarter, but it was a more volatile quarter.

And the reason that we would be over-hedged is that the terminations or lapse rates are different than what was assumed or experienced in the prior period.

And the other thing I would add is the reason we buy the one-year options is that is exactly the way the liability side works, is that the equity index credits are granted on an annual year by year basis.

And is it fair to say it is more of a timing issue than necessarily a higher cost issue? Because we have seen some issues with other people who offer the same product.

I would not characterize it as a timing issue because these are real monies. Having said that, over a period of time, the gains and the losses will tend to balance -- very much tend to balance out.

Okay. Maybe I will take it off-line. Just one other quick question. You mentioned in the press release that benefit ratios had increased in CIG and spec disease and Med Supp. Can you elaborate on that? I think in the opening statements you said there is volatility there, but was there anything that drove the volatility in the current quarter?

No, nothing in particular. They will fluctuate from quarter to quarter, and we don't have any cause for great concern with that volatility.

Jimmy Bhullar, JPMorgan.

I just have a couple of questions. The first one is on your capital flexibility and your distributing aspirations, your RBC has declined a decent amount over the past year, and I want to see you've got some holding company liquidity. You have got a revolver. What do you believe your capital flexibility is and what your ratings aspirations are long-term?

And then secondly, if you could talk about your ROE target of 11%. What do you think the main levers are that are going to get you there? Because even if you normalize the earnings from the last several quarters and add a few pennies for expense savings and higher margins because of the rerates, it does not seem like you're going to be anywhere close at least based on where current earnings or recent earnings have been.

So what are some of the levers that you believe will get you to an 11% ROE and just your confidence around that?

I will start with the response and then turn it over to Jim. As far as capital flexibility, risk-based capital levels, you know arguably at just under 300 risk-based capital at the end of 07, that capital level is more than sufficient, not only at our current ratings but at least at one to even two notches higher in ratings by most of the agencies.

An important factor in looking at capital levels is what is the operating performance and what are your sources and uses of capital. And that is why we included the slide in the presentation to show that even excluding dividends from the insurance subsidiaries, we generate about an additional $50 million of cash or capital at the holding company level on a year.

The insurance companies with $150 million of statutory income, here is where you see the extra earnings power we have from our nontaxpaying position where statutory pretax income is after-tax income. And then $150 million of statutory net income, that generates the ability to pay dividends of 50 to $100 million, while capital levels are at least maintained around 300%, but arguably they could even increase and still have dividends of at least $50 million.

With respect to the 11% ROE goal, just to remind everybody, the 11% ROE goal is based on the equity being the book value of the Company less the dot portion of the book value that is the NOL. So effectively what that means is that the equity is about $17 per share. So to get to 11% means that we have to get to $1.90 per share or so.

While showing the earnings power of the Company in the fourth quarter being above $0.25 per quarter, obviously that suggests sort of a base of a little bit more than $1.00, and we would expect to be able to move that number up quite considerably in getting it to somewhere around $1.25 by the end of this year and maybe the same sort of increase in the following year.

Getting from $1.50 on up to about $1.90 would require some capital changes. And I think we always sort of mention that as being something we will have to do to get the ROE up that last step to 11%.

And just following up on the capital question, is it reasonable -- you have bought back some stock -- is it reasonable to assume that you would be using or buying back a lot of stock over the next year given the decline in the stock price, or is that not likely given that you want to preserve your ratings and also just have some flexibility for some of the other initiatives that you have?

I guess we will continue to be opportunistic on that and look at the relative stock value, look at what our other potential uses for our capital. Certainly in our strategic alternatives, we want to be mindful of having the capital at the right levels and in the right places as well as liquidity. And then on top of that, to preserve our debt to the greatest extent possible because at 100 basis points over LIBOR from $900 million in our credit facility, that is 200 to 300 basis points lower than what it would be comparably priced at now if a company like ours could even get any additional credit in this marketplace. So that adds tremendous value to us as well and will be considered.

Tom Gallagher, Credit Suisse.

A few questions. Jim, you had just commented that I guess the feeling is core earnings power ex unusuals is about $0.25 for the quarter. Can you just at least as it relates to CIG just comment on what you view as sort of the sustainable level there? And should we be thinking about the higher amortization rate that was produced this quarter, or is some level of that recurring?

Well, I think -- without getting into too much detail on CIG, the CIG business obviously has got some of the greatest potential for increased earnings simply because it is so relatively low. We would expect that the earnings there will be able to increase by more in percentage terms than the earnings at Bankers or Colonial Penn.

But, I guess as you kind of get to a $0.25 run-rate, I'm just curious in that definition sort of what level are we viewing as normalized before any improvement this quarter for CIG? I guess that is the only thing that was not that clear to me.

I see. Okay. Well, we show it -- on page 16 we're showing a normalized earnings of $31.7 million per quarter, and that is lower than it can be.

Right. And I think with that, this is the fourth quarter of '07 obviously normalized. That does not include the full impact yet of that $6 million expense savings from the rightsizing of the sales and marketing and additional focus there. Also to the extent that a fair number of the charges in '07 for CIG were of intangibles. So value of business acquired and/or deferred acquisition costs.

Then when those are written off, they are written off never to reoccur, and so amortization going forward should be somewhat less. So from that standpoint, that is why we save the 31.7 should have more upside than the other segments.

Okay. And then the corporate of negative 22, Ed, I know you mentioned your interest costs are going to be going down because at least there's a portion of them tied to LIBOR. Can you just give a sort of rough range for where we should expect that to come out because there are some moving pieces there in terms of lowering of expenses as well.

What is the level on a quarterly basis we should expect there for the next several quarters? Is negative 22 less the interest, or is there any other considerations there?

Certainly there will be some benefit there from lower expenses and assuming that the LIBOR continues to be at its low level. But as far as on a annual run-rate basis, I would not see this number changing too significantly either way.

Okay. So that is a decent run-rate to assume kind of on an annualized basis?

Yes, again at the interest rates stay as low as they are for the whole year, then I could see that coming down 2 to $4 million a quarter.

Okay. And then the last question is, I just want to make sure I have all of the liquidity pieces right here. So at year-end, we had $90 million of oal Holdco liquidity, $80 million of a revolver, an RBC of 296. It sounds like you are managing to -- I don't know, is 250 a reasonable RBC level to think of what you're sort of managing to right now?

No, it would be higher than that. Certainly we're mindful that the rating agencies have been looking for more capital from all insurance companies with today's markets and liquidity issues. So it is definitely north of (inaudible) that we would be managing to.

Okay. So after you made the capital contribution in February, presumably your RBC went up north at 296. So I just want to see if we're still in the same place as we were at year-end after the capital contribution was made, recognizing there is a trapped capital element to that which was downstreamed. If you follow my logic, I just want to see if -- let's just say we're managing to a 280% RBC and if your RBC went up above 296, you take whatever that spread is to give you the cushion there and then you add the revolver, $80 million plus whatever the holding company liquidity was reduced by.

I guess my question is, are we still at the same place, or is there slightly less capital capacity than there was at year-end?

Actually there is more capacity. We would expect that we will have statutory earnings in the first quarter, liquidity at the holding company. As of yesterday, it was over $100 million, so things have improved.

Okay. And then your RBC, I presume would be north of 300 then?

Yes, assuming no further dividends, yes, it should be -- it should not have deteriorated, let's put it that way.

Okay. And sorry, if you can indulge me for one more question. Jim, you had talked earlier about sort of the balance of capital management looking at buyback versus alternative uses. Is it fair to say that if you're looking for a solution, that what makes sense right now is to try and retain as much capital if, in fact, an LTC reinsurance and/or risk transfer solution is going to cost some money, that may be the best use of any excess capital? Is that sort of what you are thinking, or am I not thinking about that the right way?

Well, I mean we're not going to talk about timing on any of this. But what you're saying is logical.

Okay, thanks.

(OPERATOR INSTRUCTIONS). Mark Finkelstein, Fox-Pitt Kelton.

Just a couple of quick questions. Just thinking about CIG a little bit, I mean obviously the life and annuity business has been impacted by the rating Med Supp, impacted by private fee-for-service of which you're selling through Coventry. I guess even with the cost savings that you have announced, are there further cost savings opportunities to right-size this business, or essentially are you where you think you kind of are going to get to for the foreseeable future on that?

Well, I think with CIG a couple of things have happened. Because of the change in the emphasis at CIG, the supplemental health business, the specialized disease business is becoming an increasing proportion of new sales, and of course, that is one of our highest margin products in the company overall. So, as a result of that, the value of new business associated with the new business is actually increasing, even while sales have been decreasing. And there may indeed be opportunities for cost cuts. There usually are within every business. But I think that from here it is more likely that CIG will start to grow. I mean now the supplemental health business is over 50% of the sales of CIG. That is a pretty significant shift from a year ago.

Jukka Lipponen, KBW.

Just a couple of follow-ups. In terms of the covenants that are in your credit facility, you're not all that far away in terms of the statutory capital level. I don't know what your interest coverage ratio under that definition is currently, but can you just give us some color why? I am assuming that you are confident that you're not going to be violating any of those covenants?

Yes, the debt covenant is that a consolidated 250% -- 250 -- so being almost 50 points above that is considerable margin when you think of total adjusted capital of about $1.5 billion. So that is quite significant, plus the before mentioned earnings power of the insurance companies of $150 million range. So we think we are quite a bit above the debt covenant there. And on the coverage ratio, we're also comfortably above that roughly double where we were -- where the minimum is.

And the other question I had, you also talked about in the K that to some extent you have lengthened the duration in your investment portfolio, so maybe Eric could give us some color why you're doing that at this point.

Sure. A number of reasons. On a basic level, you find opportunities in a steeper curve environment where you have new money and you have choices where you want to lay it out where you have a fairly steep yield curve. There was a pretty good pickup comparing 2's to the long bond, 10 to the long bond.

Second, relative to our asset liability matching policy, as we -- on the enterprise all revisited duration on the liabilities, while we were within our tolerances, we were a little bit short on our cash flows, particularly against the longer lines and Long-Term Care and also some of the life blocks and could pick up some benefit from lengthening the assets there.

I mean you mentioned RBC earlier, for example. To the extent that we do a little better job tightening the cash flow, projected cash flow matches, you pick up the RBC benefits among other things, as well as just being in a situation where you have less potential value volatility in the Company.

So those two underlying drivers really moved us toward lengthening, and you see that most, as I mentioned, in [Cushy], which is mostly Long-Term Care, Colonial Penn which has a lot of life, and a little bit Bankers. And I think you would see that continue through the first quarter as well.

[Ken Goldberg].

A follow-up on one of the Long-Term Care questions. Can you just give us an idea of what type of transactions you could consider to wind up that business, what that would look like potentially?

Well, the most likely kind of transaction is some sort of reinsurance deal. Selling the entire block or selling some of the companies that consists largely of Long-Term Care would be another approach to doing that.

And do you envision getting that to breakeven before you look to do that type of transaction?

Well, I mean clearly the better performing the block is, the easier it is to do some sort of transaction. When we talked about decreasing our weight in Long-Term Care, that was a long-term objective. I mean it was sort of a strategic objective because too great a proportion of the Company's earnings were coming from Long-Term Care. And it is a very volatile business, and it does not make sense for a Company of our size to have as much as we have.

So we have continued to improve the performance of the business. Anytime you do that, of course, you're improving the ultimate terms of whatever you do with it at some point in the future.

When you say breakeven this year, can you be a little more specific about what you mean by that?

Well, no, we said breakeven this year. The problem is that the business is volatile and can easily bounce up and down by $10 million, which was actually the loss in the quarter was $10 million. So you are within sort of $0.01 of deviation of being at breakeven.

So, as we continue to improve the business, we should hit breakeven, but trying to get it down to a quarter makes you subject to the volatility that you're going to get just in the normal course of that kind of business.

At this time there are no further questions.

Well, thank you very much, operator, and thanks to everyone on the call for your ongoing interest in Conseco. We continue to be focused on the middle market and retirees in America, the fastest-growing major segment in the business. We have got a unique sales machine, whether we are selling through agents, directors, or brokers, and we're committed to growing this business successfully into the future.

Thank you very much.

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