CNO Financial Group Inc (CNO) 2008 Q1 法說會逐字稿

Good morning. My name is Natasha and I will be your conference operator today. At this time I would like to welcome everyone to the first quarter, 2008, 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 first quarter 2008 earnings conference call. Today's presentation will include remarks from Jim Prieur, Conseco's CEO, Ed Bonach, Chief Financial Officer, Scott Perry, President of Bankers Life, John Wells, Sr. Vice President, Long Term Care and Eric Johnson, our Chief Investment Officer. Following the presentation, we will also have several other business leaders available for the question-and-answer period. 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 web site 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 web site. This presentation was filed in a Form 8-K yesterday afternoon. Our 10-Q for first quarter 2008 will be filed on Friday, May 9th and will also be available through the investors section of our web site.

Let me remind you that 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 for additional information concerning the forward-looking statements and related factors. The presentation to which we'll be referring to today contains a number of non-GAAP measures. These measures should not be considered as substitutes for the most directly comparable GAAP measures. The appendix to the presentation contains a reconciliation of the GAAP measures with the non-GAAP measures. And now, I will turn the call over to Conseco's CEO Jim Prieur. Jim?

Thanks, Scott. The first quarter produced very strong sales results for the company with new business volumes up 10.7% over the first quarter from last year. Sales of Bankers were up 11% and Colonial Penn had sales growth of 22% in its core products and had more than 60% growth when you add in some of the new product introductions at Colonial Penn. CIG sales were down, but supplemental health sales at CIG were up 23%. There were also very good results in the LTC close block with a GAAP loss of less than $2 million in the quarter in this segment, and that is after including more than $5 million of amortization of intangibles. As you will see later in the presentation, this business is behaving in a much more stable way. In investments, we did have impairments which will provide quite a bit of detail on shortly. These losses were less than most insurers, as a percentage of assets, but they certainly weren't insignificant.

We had some hedging losses on equity indexed annuities, which while the equity annuities are hedged effectively on an economic basis, they do produce some volatility on a GAAP accounting basis, and Ed will describe that later. At Bankers, earnings were impacted by a couple of things. There were higher than expected claims in long-term care, and the equity index annuity issue that I just mentioned. The results for the first quarter were much more stable than the quarterly results were last year. There were no significant period accounting adjustments, no significant DAC or VOBA of overcharges. It was the third consecutive stable quarter for the LTC closed block, as it moves through to profitability. The multi state market conduct exam also reached a conclusion. We made a lot of progress, and I think we'll make more as the year unfolds.

The Chicago facilities consolidation is on track for completion in the second quarter, and there will be a pretax charge of $15 million with ongoing annual savings of $6 million. Conseco, as we announced at the March analyst meeting, is continuing to explore strategic alternatives and we are targeting late summer, early fall to get back to you on that.

On the multi state examination, I'm pleased to say that we are able to announce that the multi state market conduct exam was completed. This exam focused on CSHI, Conseco Senior Health Insurance, the company which holds most of the LTC run off block and also on Bankers. You may recall that we asked the state DOIs to do a multi-state exam. The essential finding was that there was no pattern of improper claims denials, but there were problems with prompt payment of claims. The basic fine was up to $2.3 million, which would be increased by $10 million if we don't hit certain performance targets in the future. These performance targets are on complaint turn around times and prompt paying. We're also going back to review certain claims, which will cost us $4 million. Now, this $2.3 million fine and the $4 million remediation costs were accrued in 2007.

Finally, in our performance improvement plan for long-term care, which had been developed sometime ago, we planned on spending $26 million on performance improvement measures, and we committed in the agreement to spend that sum. This isn't extra. This is all operational improvements planned before, part of the operating and the IT budget, much of which is related to the migration to the long-term care group of administration and migration to the long-term care group's systems. There are no extra costs in this. This is the gross costs associated with that migration, and operational improvements, and is offset by savings in variable costs going forward. In fact, more than a third of these costs have already been spent and just in the regular operating budget. With respect to the performance targets for service that are the multi-state exam, we are currently at those targets and John Wells will add more to this in his presentation a little later this morning. Next up is our CFO, Ed Bonach who will take us through our financial data. Ed?

Thanks, Jim and good morning. Let me start by covering first quarter 2008 results. Overall, the company had solid underlying performance from all four of our operating segments. For the first quarter of 2008, the net loss applicable to common stock was $5.8 million, which includes $26.5 million of net realized investment losses. This equates to a loss of $0.03 per diluted share. Our net operating income of $20.7 million equated to $0.11 per diluted share for the first quarter of 2008, compared to a net operating income of $3.7 million in the first quarter of 2007, or $0.02 per share. Turning to Slide Eight, in our Bankers Life segment, pretax operating earnings were $29. 1 million in Q1 of '08 compared to $45.5 million in Q1 of '07 Results for the first quarter of 2008 were affected by several items. Our LTC products experienced a reduction in earnings of approximately $10 million, resulting from higher claim volumes and costs.

Earnings were also negatively impacted by approximately $7 million related to equity indexed annuity products. This variance, primarily resulted from the change in the value of the embedded derivative related to future index benefits, which are reported at estimated fair value in accordance with the accounting requirements. This amount includes a $2 million charge in first quarter of 2008, related to the adoption of statement of financial accounting standards number 157, "Fair Value Measurements", , also known as FAS 157. Finally, a reduction in earnings of approximately $6 million as compared to the first quarter of 2007 was related to company-owned life insurance policies, which were purchased in 2006 and 2007 to fund the segment agent deferred compensation plan. This resulted from a decrease in the estimated fair value of investments underlying such policies in the first quarter of 2008, and a $2.7 million death benefit recognized in the first quarter of 2007.

For Colonial Penn, the pretax operating earnings were $3.7 million in the first quarter of '08, compared to $4.6 million in the first quarter of '07. Results for first quarter of 2008 were affected primarily by higher marketing expenses related to our product line expansion initiative. In our Conseco Insurance Group segment, or CIG, pre tax operating earnings were $23.3 million in Q1 '08, compared to $33.5 million in Q1 '07 Results for the first quarter of 2008 were affected primarily by a reduction in earnings of approximately $4 million driven by lower terminations on specified disease policies. First quarter 2007 earnings also included $5.4 million from the annuity block, which was subsequently reinsured. In addition, we also experienced a reduction in earnings of approximately $2 million related to equity indexed annuity products.

Again, this variance primarily resulted from the change in the value of the embedded derivative related to the future indexed benefits reported at estimated fair value in accordance with the accounting requirements. This amount includes a $0.8 million charge in the first quarter of 2008, related to the adoption of FAS 157. We are very pleased to report the LTC runoff block is continuing to approach break even as predicted and we continue to also improve its stability. In our other business and runoff segment, we recognized the pretax operating loss of $1.3 million in the first quarter of 2008, compared to a loss of $26.1 million in the first quarter or 2007.

Results for the first quarter of 2008, show the progress we continue to make towards restoring profitability through premium re-rates, claims and expense management. Consistent with what we have seen throughout the industry and the market, the company recognized net realized investment losses of $26.5 million, which is net of related amortization and taxes, in the first quarter of 2008. Gross realized losses, before related amortization and taxes, included $41.3 million of write-downs for securities, we determined were subject to other than temporary impairment. Eric Johnson, our chief investment officer, will address this in more detail later in the presentation.

Given the impact on our earnings from equity index products in both our Bankers and CIG segment, let me touch on how the accounting impacts our reported earnings. Let's now turn to Slide Nine. We fully hedge our exposure to the equity markets related to these products. The options purchased are one-year options that match a one-year equity indexed benefit of the product. As policies terminate in the course of a year, we don't immediately sell the related option but rather we periodically rebalance our option positions to appropriately hedge the remaining liability exposure. This results in a modestly overhedged position in between rebalancing. To the extent markets move down in the quarter as they did in the first quarter of 2008, we report a loss on these excess options. Conversely market increases would result in a reported gain. The accounting for these products creates fluctuations as the liability portion of the benefit is valued on a very different basis than the supporting option. This noise is a vagary of financial accounting standard 133. The differences, however, are temporary and do balance out over the life of the contract.

Our trailing four quarters operating return on equity, excluding litigation charges, loss on coinsurance, transaction and deferred tax asset valuation allowance was 1.7% for the four quarters ended March 31, 2008, which is consistent with that which we reported as of December 31, 2007. 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. As we have stated, our long-term goal is to improve ROE to 11% in 2009, which we believe is achievable. Net operating income for first quarter of 2008 was $20.7 million or $0.11 per diluted share. This compares to net operating income for the first quarter of 2007, of $3.7 million. The Q1 '08 operating income is excluding the $26.5 million of net realized investment losses, or $0.14 per diluted share, which resulted in a net loss applicable to common stock per diluted share of $0.03. As compared to $0.07 loss per share in the first quarter of 2007.

Slide 12 consolidates several of our more important indicators. Book value per diluted share of $24.40 at March 31, 2008 is virtually unchanged from year-end 2007's value of $24.41. Our debt and preferred stock to total capital ratio excluding-- the accumulated Other Comprehensive Income was just over 21% at March 31, 2008, consistent with year-end 2007. Risk-based capital at our insurance companies remains strong, ending the first quarter at 281%, and I will touch on this further in a moment. Our investment portfolio continues to perform within expectations. Net investment income on general account assets for the first quarter reflected an earned yield of 5.83%. Investment quality remains high and we continue to have very limited financial exposure to subprime asset-backed securities. Eric Johnson will provide more detail on this in a few minutes.

As indicated earlier, our consolidated RBC or risk based capital ratio has declined somewhat since year end 2007. Absolute capital; however, increased but not as much as required capital. The first quarter RBC decline is primarily as a result of business growth from our record sales, increases in reserves due to the long-term care reserve pivoting and the interest rate environment that increased the dynamic testing components of required capital. Turning to Slide 14, collected premiums on a trailing four quarters basis are up over the third and fourth quarters of 2007. Strong increases at Bankers and Colonial Penn were offset by a decrease in CIG, primarily due to the sale of the annuity block in 2007, and a focus at CIG on more profitable business. Maintaining the appropriate liquidity and capital levels is extremely important to our business, especially in today's market as is optimally deploying our capital.

Our liquidity remains strong, increasing in the quarter to over $100 million at the holding company, plus an untapped $80 million revolver. Slide 15 details the major 2007, and the first quarter 2008, sources and uses of cash for the holding company. It is important to note that this summary excludes any dividends that were paid up from subsidiaries and also excludes share repurchases. We did not repurchase any shares in the first quarter of 2008. Liquidity at the holding company is impacted by the strength of our insurance subsidiaries. Our insurance companies generate approximately $150 million of statutory profits annually, excluding extraordinary items. This is in excess of their capital needs to support ongoing growth. In addition to dividends from the insurance companies, the holding company generates cash from interest payments on surplus notes, tax sharing payments, fees for investment services and fees for administrative services provided to the insurance company. Let me now turn it over to Scott Perry, President of Bankers Life, to cover that segment's

Thanks, Ed, and good morning. During Q1 of '08, Bankers achieved record setting sales levels with $115 million in new annualized premium, which represents 11% growth to Q1 '07, our prior biggest quarter. Results were driven by growth in Med Supp and Med Advantage, as well as annuities, partially offset by lower LTC and life sales. During Q1 of '08, we recorded all open enrollment Medicare Advantage Private Fee For Service sales activity, which covers the period from November 15th to March 31st. As we commented during our last earnings call, we are very pleased with this year's results. Our net new members in 2008 exceeded 28,000, a 26% increase to the 2007 open enrollment results.

With this year's results our total Med Advantage in force membership is over 170,000 with PFFS, accounting for over $41,000 and PDP at nearly 130,000 members. As Ed stated, earnings during the quarter were affected by three important factors: One, unfavorable long-term care results, which I will address in more detail in the next slide, Two, lower EIA income, due to accounting fluctuations that Ed previously discussed and finally, Three, a decrease in the estimated fair market value of investments underlying company-owned life insurance policies. Premium re-rates on Bankers' in-force long-term care business , affecting $157 million in premium, continue to be in line with expectations achieving an annual financial impact of $17.2 million as of 4/30/08.

Turning to Slide 17, the impact of long-term care results on Bankers first quarter earnings is driven by unfavorable claims experience. While the uptick in claims experienced is not entirely unexpected as the book continues to age. In the quarter, we did see an increase in the number of initial claims and higher than expected payments on continuing claims. We will continue to manage long-term care profitability through a variety of levers. These levers include actively managing premium rates, new business risk selection tools, continuing to enhance our claims management, and making efficient use of our operating expense dollars. Related to new business risk selection, in 2007, we implemented the EMST test, a memory skills test, significantly improving our ability to detect cognitive impairment which is one of the most costliest categories of claim. Additionally, regarding claims management, we are in the process of reviewing our procedures at a more granular level, including utilizing outside expert resources. We expect this review to provide insight into opportunities that can positively impact profitability.

On Slide 18, we see the impact of the earnings items previously discussed, producing an ROE on the trailing four quarters basis of 9.5%. On the distribution front, Q1 '08 proved to be another strong quarter for Bankers with double-digit sales growth. These results were driven by strong Med Advantage sales, and Med Supp and annuities, partially offset by lower long-term care and Life sales. From a product line standpoint, Medicare Advantage sales reached $59 million which represents a 26% increase to Q1 '07. As a result of broader market coverage, and a more intense focus by our field force to take advantage of the open enrollment period.

Bankers also delivered strong first-quarter Medicare supplement sales of $16.2 million, 12% growth to the prior quarter -- prior year, I'm sorry. Combined Medicare sales grew 20%, reaching $79 million versus $65 million in 2007. This strong growth was complimented by an 8% growth in annuity sales. Partially offsetting these positive results were lower long-term care and Life sales. Long-term care sales were down 19% from $11.7 million in Q1 of '07 to $9.4 million in Q1 of '08 and Life sales were down 8% from $12.6 million in Q1 '07 to $11.7 million in Q1 of '08. Both of these product lines were affected by two factors, first, we experienced a processing backlog resulting from the implementation of a new front and application processing system during the quarter. We expect the backlog to be fully worked down and processing times back to normal by the end of the second quarter. Secondly, the field's heavy focus on Medicare Advantage during open enrollment, did detract from the normal attention these two lines received. Also affecting long-term care NAP is a slight shift to sales of lower premium short-term care and home healthcare products. These products expand the price point of our middle income market and have strong margins but do produce less premium per policy than comprehensive plans.

Bankers continues to enhance its ability to attract and retain new agents into our business. During Q1 of '08, new agent recruiting was up 7%. By the end of the quarter, our agent force grew 6% to 4,750, representing 250 more agents than at the end of Q1 '07. In addition, we continue making improvements on our agent productivity which during Q1 of '08 grew 4%. These strong sales results and agent force metrics underscore the lack of significant impact the current economic conditions have on the Bankers field force. Overall, as Slide 20 illustrates, Q1 of '08, represents a record sales quarter but more importantly, Bankers continues to build on strong momentum of past quarters, growing 10% compounded annually since 2003. This consistent growth has been driven by increases in both the size and the productivity of our agent force, plus the timely identification and addition of new product offerings to satisfy the needs of our target customers. This steady growth of new premium provides Bankers with a strong base on which to grow future earnings. I will now turn it back over to Ed to cover Colonial Penn and CIG

Thanks, Scott. Turning to Slide 21, sales as measured by new annual premium, or NAP, increased 67% from Q1 '07, with both core and test products contributing to the NAP growth. Excluding the product tests, NAP increased 22% over the first quarter of 2007. The variance in earnings is primarily attributable to the investment to extend their brand into the private fee for service market, for which there's no first quarter of 2007 equivalent. These investments, which also impacted the fourth quarter of 2007, total over $9 million, which have reduced the trailing four quarter ROE to 8.4%. Colonial Penn continues to demonstrate a capacity for increased lead development, which is a key indicator of future sales for a direct marketing organization.

Turning to Slide 23, CIG's overall NAP sales were down 21% from the first quarter of 2007. Again, with strong sales gains and Specified Disease offset by decreases in Medicare supplements and annuities. While CIG sales are down, there continues to be greater focus on more profitable business, with the contribution to profit from the new business higher than it was a year ago. The decrease in Q1 '08 earnings from Q1 '07 is primarily attributable to the increase in specified disease benefit ratios, which is driven by higher persistency. Also negatively affecting results was the accounting for equity index products as discussed earlier in the presentation. In addition, Q1 '07 results included profits from certain annuity blocks which were subsequently reinsured during the latter part of 2007.

Slide 25 illustrates the significant changes in CIG sales mix compared to the first quarter of 2007. Continuing the trend, sales rose by 23% for the quarter in specified disease which is CIG's highest margin product. The largest NAP sales decline was in annuities, which is CIG's lowest margin product line, that was further influenced by an unfavorable interest rate environment. CIG's Medicare supplement sales were negatively impacted by the competing Med Advantage products. Next, I will turn it over to John Wells, Senior Vice President, Long Term Care, for a discussion of our LTC runoff results and turn around progress. John?

Thanks Ed. First quarter financial results for the Long Term Care Closed Block are close to break-even and this outcome is significant in that we now have experienced three straight quarters of improved results. There are two primary reasons for this continued progress.

First, the significant reserve strengthening implemented in the second quarter of 2007 has led to stabilized results. Second, we are near profitability because it's the success of the long-term care program for improvement, starting in early 2007. Through active rate management, significantly improved claims processes and increased operating efficiency, the turn-around program launched early last year has improved the business fundamentals of this block. These improvements have also resulted in better service for our policyholders and advances in compliance.

The work related to the Closed Block system and operational solution from the long-term care group is progressing well. Through this initiative, we expect continued improvements in claims management, customer service and compliance. While we are encouraged by the positive momentum on this block, the results for this product line can be volatile. On Slide 27, you can see the graphic depiction of the improving results over the past three quarters. Also of note, is that collected premiums have reversed their decline in preceding quarters indicative of the positive results of rate increase program. Turning to Slide 28, results for the quarter net to a $1.3 million loss versus the $26.1 million loss in the prior year.

Turning to incurred claims on Slide 29, this demonstrates our claims improvements. Prior period development was $13 million favorable, our third straight quarter of favorable development. In addition, this quarter's verified claims of $101.9 million are the lowest of the last four quarters. Our operating metrics on Slide 30, reflect a more stable claims operation, another one of the positive outcomes of the turn-around program. Claims paid for first quarter, 2008, were at a lower level than the prior quarter, driven by an inventory reduction in the fourth quarter of 2007. Our claimant counts are slightly less than the previous three quarters and in line with the first quarters of the prior two years. Termination rates for the first quarter are also essentially even with the average of the prior two years history.

Moving on to rate increases on Slide 31, we have exceeded the goal for each element of the 2006 round of rate increases and are on track for where we had planned to be for the 2007 round of re-rates, also known as Round Two. Preparations for a third round of actuarially-justified increases are underway with the goal of having analysis completed by the end of the second quarter. We expect that we will file for additional rate increases for most policy forms beginning this summer. We are encouraged with the steady progress on this block of business, but need to continue to build on the past three quarters. As part of this, we need to continue on with the foundation laid in the turn around program, namely we need to continue to secure actuarially justified rate increases, keep improving claim management and improve operating efficiency.

As Jim mentioned earlier, we view the conclusion of the multi-state exam incentive and settlement as a positive step for Conseco. As part of the settlement agreement, there are a couple of performance metrics that we will be reporting to the regulators. These metrics include prompt payment of claims and timely complaint handling. The early results indicate that we are meeting the requirements for both of these metrics. Work is also beginning on the review of certain claims from 2005, to early 2007. Another very important piece of work we have in front of us relates to how LTC fits into the overall portfolio of the company.

The company is working actively to pursue options to reduce its LTC exposure. In summary, the significant efforts and results from the turn around program coupled with the second quarter 2007 reserve strengthening have brought us close to break-even. And now, I will hand it over to Eric Johnson, our chief investment officer who will discuss CNO investment portfolio. Eric?

Thank you, John. Good morning, everybody. As Ed described earlier for first quarter, investment income increased the $352 million, representing earned yield of 5.83%. This was consistent with our expectations. It's attributable to a higher level of invested assets and slight increase in book yield due to portfolio lengthening, and also a wider credit spread. It's offset to some degree by prepayment losses. Asset quality remains a high priority. Our low investment grade remains satisfactory at about 5% with general account asset. This is a highly diversified allocation. It receives very careful attention.

Slide 34 breaks out the first quarter impairments. We recognized $41.3 million in impairment losses in the first quarter. These losses substantially have resulted from mortgage market liquidity and rising delinquency in loss trends which particularly impacted our prime jumbo portfolio. We believe many of these impairments, which are recognized in the first quarter may ultimately reverse and may not represent current economic losses, as the individual securities themselves do exhibit satisfactory performance. We also wrote down a small number of fallen angels which were negatively affected by adding substantial amounts of debt and leverage transactions. In the long term, we believe these impairments may also prove to be temporary in nature.

Moving on to Slide 35, you will see there is our structure securities portfolio which is very highly rated over 89% AAA.. Moving on to Slide 36, we'll discuss subprime. During first quarter, our subprime exposure continued to decline, principally as a function of collateral seasoning. We continue very careful deal-level surveillance of that portfolio. We are looking at some very conservative economic assumptions, and our objective is to manage to a sufficient coverage of projected collateral losses, including the margin for adverse development and error.

Going on in Slide 37, you will see there that subprime is down to 44 basis points on our total portfolio, at market value approximately $103 million. While in general, delinquency and loss severity trends have been unfavorable in the subprime space, we remain satisfied with the great support provided in our collateral. We do recognize; however, this will remain a very volatile asset class and we will continue to work on it very hard.

Going on to Slide 39 now, 39 talks about our CMBS portfolio, which is approximately $1 billion, slightly over 4% of invested assets. This also is a highly rated portfolio, over 70% in the triple and double A categories. We remain satisfied with the performance of our collateral here, reflected in very low delinquencies and significant loss cushions; however, the wide degree of spread widening in this sector is generated and material unrealized loss, especially in the lower ratings categories, triple Bs. As a general comment, I do believe we will continue to meet our objectives for income yield and quality this year. However, I think it is reasonable to assume that market volatility will persist and could lead to continued elevated impairment levels in the near term. With, that I will turn it back to Jim Prieur.

Thanks, Eric. One of the most important take aways, I think from the quarter that was just completed is that Conseco has the ability to grow at a very attractive rate. Bankers is continuing to grow at more than 10% per year, while Colonial Penn's core business is growing at more than 20% with the possibility of extending this brand into other markets. Essentially midstage term and PFFS.

We have improved-- we have improving earnings stability with CIG returning to profitability, and the LTC runoff block, basically at break-even now with stable claims reserves. And we said for sometime that fixing the LTC Closed Block would take quarters, not weeks and months. It's now been a number of quarters and the results are now visible. The claims reserve volatility has been reduced, Re-rates are continuing to come through and there have been improvement in claims management and you can see that quite clearly. Management is very focused on improving shareholder value. The reason for looking at strategic alternatives is to improve the value of the company, and to reduce the gap between what the intrinsic value of the company is and what is the current share price is. The analysis behind this is targeted for completion by the end of the summer or the beginning of the fall, and we'll be back to you with that.

Moving on briefly from the strategic issue to a practical issue, I would like to comment just quickly on expectations for the earnings power of the company. First, and, maybe we haven't made this quite clear enough, there's quite a bit of seasonality in Conseco's earnings. Some of this has not been that visible when earnings were swamped by reserve strengthening and remediation charges. And, of course, the product shift to Medicare-related products has made this seasonality a bit more stronger than it was in the past. Med Supp, Med Advantage and PDP have quite a bit of seasonality to them, and in addition, there tends to be much worse mortality on Life products in Q1 every year, particularly in our target market segment.

So overall, you should expect that less than 20% of the annual operating earnings will occur in the first quarter. And while that's true for the whole company, it is particularly true for Bankers, given their business mix and that you might expect something around 17% of their earnings to be generated in the first quarter. At the last quarter's earnings conference call, I said that the run rate of earnings was about $1 a share per year. And that we would expect it to rise to somewhere around $1.25 per share by year end. And frankly, the numbers that we presented today are consistent with that. If you take the earnings actually recorded by Bankers and take it back into it the special effects -- the special factors in Q1, it suggests that earnings will be in the high $60 million range per quarter. Similarly with CIG, it suggests earnings in the mid-$30 million-- between 30 and $40 million per quarter and at Colonial Penn, something over $6 million per quarter. And with that, we'd like to turn it over to questions, and operator?

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Nigel Dally.

Jim, just as today's (inaudible). You have been looking at it for sometime. Can you provide us any color on what appears to be the most likely alternatives at this point? And then second question just on capital, the risk based capital ratio continues to decline, and I assume that some of the strategic alternatives you're examining may also require some incremental capital. Against that backdrop, how much deterioration are you prepared to see before you're forced to consider potentially raising incremental equity capital? Thanks.

Thanks, Nigel. With respect to the strategic alternatives, we are looking at the complete range of strategic alternatives, and we really can't share anything more than that at the current time.

Yeah, and Nigel, on the risk-based capital, we believe that the Q1 '08, 281% is at or near the bottom for the year. We would expect that to increase during the year through statutory income generation and also we would expect that we will not have as onerous of a long-term charge on the risk-based capital from the dynamic elements of those components.

The effect that the-- obviously ratio has gone down, potentially limit some of your strategic alternatives that you are potentially looking at?

We don't believe so.

Okay. Very good. Thanks.

Your next question comes from the line of Randy Binner.

Hi. Good morning. Quick question for Eric Johnson on the investment yield that came in at 5.8%. Two things, do you see opportunities out there in the market to potentially improve that yield? And can you give a little more color on the prepayment losses you saw in the quarter, and to what degree those might be recurring?

Sure. And I will -- really two questions there. Year-to-date we've experienced a subtle but noticeable increase in book yield, probably in the context of four or five basis points. Between, you know, book yield and effective yield, there can be various quarter-to-quarter fluctuations that might be a positive or negative prepayments, which can be positive or negative and other -- other factors. These, while they tend to be in fairly small dollar amounts because they are annualized in terms of producing effective yield calculations, have a fairly material impact on the difference between book yield, which is what we really manage and effective yield, which is kind of a residual. During the first quarter, that variance was negative, because there were various negative effects on effective yields that were relatively small dollar amounts. I mean, a couple million dollars. In many quarters, we trend favorably, kind of negatively in the first quarter and it's over a substantial period of time tends to balance out.

Second quarter-to-date, I frankly couldn't tell you how that's trending, although I can tell you in either direction, it's probably not that significant. To your second question, which is are there opportunities to continue to increase book yield? Yes, we've had that experience year-to-date, and I would expect it to continue through the rest of the year. We think that's achievable while also protecting a portfolio quality and stability. And so, while I don't want to get too much into specific -- issuing a specific numerical forecast for the year, I do think the trend to increasing book yield and protecting portfolio quality are consistent with each other and probably happen through the rest of the year.

Randy, Let me add too, there was a lengthening of the portion of increasing the yield is consistent with our liability portfolio. So we are not taking a mismatch risk there with product lines like life insurance and long-term care. We have a significant amount of long-term liabilities.

Okay. Great. That's helpful. One other quick question, you seem to be kind of laying out a case that derivative adjustments for EIAs both at Bankers and CIG do not have economic value. Is this something we might look to in the future being reported in a different way. Not all life insurers include those adjustments in operating results?

Yes, we are more and more aware of the different ways that companies report earnings on these products. We certainly are reviewing our presentation of results there and we'll most likely make modifications in the future.

Okay. Great. Thank you.

Your next question comes from the line of Tom Gallagher.

Good morning. I guess the first question for Eric Johnson, I noticed that most of the impairments or at least a good percentage of them were in prime jumbos. I'm just curious what is driving this and if you can comment on how much -- how big that book is in terms of prime jumbo residential loans. Thanks.

You're welcome and good morning. Again, two questions. I'll let me do the first one. Interestingly enough, the underlying collateral, in respect to that portfolio continues to perform pretty much as we expected when we put the securities on in terms of the trend, the roll rate of delinquencies, losses and severities. It is a-- as you know, that's an area where the historical loss rates are -- delinquency rates are very, very low in the double digits of basis points over the life of a security. You are dealing in relatively fine gradients here. And, the deltas are pretty precise.

Having said that, that's a market which during the first order, particularly, I experienced a tremendous amount of volatility and loss of liquidity as -- from the -- looking at the whole pipeline. The securitization market dried up, the underlying lending at the bank level dried up and the whole market really came to a halt. Existing securities depreciated in value pretty significantly. It's notwithstanding their underlying performance, and it-- it-- right now is difficult for us to represent that depreciation and value will be recovered in a reasonable time horizon now. We did not experience any ratings transitions in this area or particularly, any changes in underlying trends, but, in testing impairments, you look at a variety of factors some of which are fundamental and others more market technical. Putting all of those factors together, I decided we would break down the value of our portfolio in that area. I can tell you that because the portfolio is relatively small, it's very unlikely that future quarters would have this kind of experience. And in terms of giving an overall size, it's well less than $100 million in aggregate.

Okay. So really prospectively, this shouldn't be a focal area, especially if the underlying cash flows and the mortgages aren't showing severe signs of stress?

Prospectively, I think it would be very difficult in asset fluid terms for us to experience this again in this phase.

Okay. That's helpful. The next question I had was on your comment on cognitive screening that had been put in place for the Bankers long-term care. Can you just give us a sense for what -- what has your screening technique been to date? Are you using them -- is this brand new? Maybe a little color there. Also is this really what drove or what has been moving the increase in claims in Bankers? Is it really on the cognitive side? And if so, is that something you see as reversible or continuing to pressure results?

Sure, Tom. This is John Wells. I will take that one. Relative to the EMST cognitive test. Pretty much the industry has gone there. Bankers started rolling that out to the field last year. And continues to do so. So it's pretty -- it's a pretty standard test. Before that, there was a cognitive screen. It wasn't as sensitive as this one is. And this one is very sensitive, so we are rejecting more applicants that have cognitive, perhaps -- perhaps would have a cognitive claim in the future. As to claims, cognitive and cognitive related claims, are our largest claims cost. So by doing this on the front end and having the cognitive test on the front end, we feel it will reduce future claims costs. Although it's just tighter, It's not that we didn't have it before. It's just a tighter screen.

Okay. Thanks. And then John, just a follow-up, is it fair to say, though, that since you had a less rigorous screen in place, that we might still feel some of the after-effects of cognitive claims on your back book for sometime or for --

Well -- right. Ton, that's exactly right. Since we have been doing it recently, it's just going to improve. And we don't have really any early results yet, but that's the -- basically what the industry is seeing and what we plan to see going forward. And we said, 30% or more of our claims are cognitive related and we believe we'll see that decrease over time.

Yeah. I also think it's important to put our $10 million variance in the quarter in context. With seven of that $10 million being related to increased number of initial claims, we have 400,000 policies in force, about $2.5 billion of active life reserve and over half a billion dollars of premium. So related to the size of our in force, $7 million is a relatively small percentage. Now, as a percentage of earnings, obviously much higher which underscores why our strategy is to reduce our exposure, we're overweighted in long-term care with that volatility quarter-to-quarter that way. And then the $3 million remaining of the $10 million was on adverse loss development. While we have over $700 million of claiming reserves on this block, so $3 million on $700 million, again, a very small percentage of what's in force.

And so following up on that, so your point really on this is, it's well within the normal deviations that you would expect and not necessarily representative of a trend, is that fair to say?

Well said, Tom. Yes.

Okay. Thanks very much.

Your next question comes from the line of Andrew Kligerman

Sorry, my line was breaking up a bit, but I do want to follow up on earlier comments on cognitive testing, in regard to the Bankers long-term care ratio. We are looking at a trend where it picked up in the first quarter to 11 -- 111.6% that Bankers lost long-term care ratio. That was 103.3% in the fourth quarter. It just seems to be rising up. So what I want to understand is just maybe you could isolate out what you think you can improve it by with better cognitive testing techniques and then generally do you think this large spike sequentially was an anomaly? It seems to be both a frequency and severity issue. Is this an anomaly and should it revert back to what I think we believe was a somewhat elevated number in the fourth quarter.

Yes, Andrew, this is John Wells. I will take a piece of that relative to the claims piece. We had been talking about cognitive but also on the back end, we are also, as Scott referenced in his presentation, we are doing some analysis. We will be doing some more analysis on the claims-- the claims management, which in the near term would address looking at things like eligibility, decisions, plans of care, recertification, some of the same kind of things that we were doing with the closed block. And so we expect do that, have an outside expert come in and help us take a look at that and make sure that we are continuing to use industry best practice for claims adjudication, in addition to the cognitive screening up front, which will -- you'll see over time.

Just to emphasize to that point, John, this is Scott. The cognitive testing -- we started this back in 2007, it was a normal transition from the test we were doing, up grading test. It is not in anyway a reaction to the quarter's results. And although certainly cognitive is affecting just claims costs in general in the industry, the testing that we are doing is really proactive in getting in front of cognitive disorders in the new business that we're issuing. I know Ed wanted to make a comment.

Yeah, and I think the other thing, Andrew, with the last ratio or benefit ratio that you quoted, that's the non-interest adjusted.

Understood.

We do expect as the book of business ages, that that percentage would go up somewhat from period to period, and, yes, the interest adjusted also went up somewhat, but that's really what shows with over $3 billion of reserves. It includes the investment income on that, which is a significant portion of revenues to make sure that we are having total revenue, the premium and investment income to cover benefits and expenses. So -- and then lastly, to the -- to the question that Tom Gallagher also raised, we see this fluctuation in the quarter to be within the normal range of fluctuation that you can get on this business from quarter-to-quarter.

Okay. So maybe you need to attack it a little differently. If it is within the normal range, maybe give me a sense of the range of what you think the interest adjusted loss ratio should be. Maybe that would help me understand that. And then back to my original question, what kind of -- maybe you could incrementally give a range of impact around what these initiatives -- and I understand that they're not new -- but what kind of impact would these initiatives have, maybe give us a little range there, just to give us a sense of how normal this is for my model. What should I be plugging in?

I would say for the interest adjusted benefit ratio, something in the mid-70s would be normal.

It was what this quarter?

It was 79%. I think, it can very much vary by 3 to 5 percentage points quarter to quarter.

And then these improvements, you think that would be improved by how much?

Well, have you considered, we have about $600 million of premium, about $1 billion or so of revenues there. I think between re-rates that still have to come through, with the claims management increasing our yields on the investment income, that can easily have a couple percentage points impact over the course of the next 12 months.

That's very helpful. And then back to the RBC ratio, what's the biggest driver going from 296 to 281 in this quarter.

It was largely growth related. And the acquisition cost, of course for statutory are not capitalized and with our product line expansion in Colonial Penn and record sales at Colonial Penn and Bankers.

But per your comment earlier, Ed, you think that's going to stabilize, despite the fact you will continue growing.

Yes. On one end, we would love to have record sales every quarter, but I think it's unreasonable to expect that every quarter we will would have record sales.

Thanks a lot.

Your next question comes from the line of Jimmy Bhullar.

Jim, are you there?

Mr. Bhullar, your line is open. (silence) .

Maybe he dropped off. We should go on.

Your next question comes from the line of Jukka Lipponen.

Good morning. Two questions. First, from a strategic perspective, would you potentially consider simply outsourcing the long-term care product instead of manufacturing it yourself, even at Bankers.

With respect to bankers. You know, that's not an impossible thing to do. I mean, certainly Conseco and Bankers in particular, is very focused on the senior middle market. And, the senior middle market has got a need for long-term care. We don't necessarily have to manufacturer 100% of the product that we are offering. But it would be an important product to have in the -- in the bag of products that the salesmen are taking out to the field.

Right. So then that potentially is one of the options you might be considering.

There's a wide range of options and that would certainly be amongst them, yes.

And second question with respect to Conseco senior health, what were the statutory operating results in the first quarter and was there any kind of capital contribution to that company in the first quarter?

There was not any additional capital contribution. The statutory last pretax was about $14 million and so the difference between -- or the GAAP result is, of course, you don't have the intangibles to amortize but then you do have the funding of the long-term care reserve pivot.

Thank you.

Your next question comes from the line of [Omar Malik].

Hi. I would like to ask a question about the convertible debentures. My understanding, per the documents, is that the investors can require the company to repurchase the debentures for cash on specific dates, the first being at 9/30/2010.

Okay.

My question is if most investors were put to put them to the company, have you thought about how you would finance it? And secondly, is there anything else in your credit agreement or elsewhere that would restrict you from buying them back?

There's nothing restricting them from buying them back. There's both a put and call at par in September 30th, 2010. So, when you look at our debt financing, we've got that, plus we've got the bank line which is the larger piece of debt, which matures in 2013. So those are the two major pieces of debt obligations that the company has got.

Is there is a certain scenario with the put or the call that you foresee is most likely?

Well, I mean, I would think the -- it's very likely that the thing will mature effectively on September 30th, 2010.

And that is the scenario that we are planning for.

Okay. It's almost likely -- would that be an incremental term loan?

There's a wide variety of how we can finance that, which we are evaluating our alternatives and the preferred path, which, of course, is dependent on several factors including what the financial markets are somewhere more towards the end of this year and the beginning of next year.

Perfect. Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of [John Nidell].

A quick data question. And I apologize for my voice. Just what the statutory capital was on the end of the first quarter on a consolidated basis.

Yeah, consolidated, it was just short of $1.5 billion.

Thank you very much.

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

Your next question comes from the line of Jimmy Bhullar.

Just a quick question about your earnings power and then the end (inaudible) in general. Could you discuss at one point, if your earnings don't improve the end (inaudible) recoverability becomes and issue and just if you could give us some metrics on just how much earnings you would have to make over the next few years to be able to use up most of that. And at what point would you have to incur a write-down in your end (inaudible) if possibility remains weak. And that's all I have.. That's all I have.

Okay. Well, I mean, the NOL is not at risk. I mean, either first quarter or going forward at this point. So our current earnings expectations will easily take care of the NOL going forward.

And I guess, that's it. The other thing I'd add is to remember that, there really are, as we look at it, three components to earnings and the NOL. There's the capital losses which, we've got an allowance up against the NOL there. So additional, capital losses don't impair our net recoverable NO L. On the operating income side, there's the life and the non-life income that's important. And, generating operating income in the first quarter and to Jim's point about what we would expect for the full year certainly is in line with recovering and using the net NOL. And lastly, I will say that, these NOLs do go out for many years, so it is much more than what we earn this year. It is over, a ten plus year period that really comes into account to assess the value of the NOL.

Thank you.

Well, thank you very much, everyone for attending this conference call. Conseco is focused on the senior middle market in America, it's the fastest growing major segment in the insurance business. We have a unique sales machine dedicated to the market whether it is through agents, directors or brokers, and we are committed to growing this business successfully in the future. Thank you very much.

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