CNO Financial Group Inc (CNO) 2008 Q3 法說會逐字稿

Good morning. Thank you for joining us on the Conseco third 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; 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 last evening'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 this morning in a Form 8-K. We expect to file our Form 10-Q for third quarter on or before Monday, November 10th, and it will also be 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 this morning's press--yesterday's press release for additional information concerning the forward-looking statements and related factors.

The presentation to which we will be referring to today contains a number of non-GAAP measures. These measures should not be considered as substitutes for the most directly comparable GAAP measures. The appendix to the presentation contains a reconciliation of the GAAP measures with the non-GAAP measures. And now I'll turn the call over to Conseco's CEO, Jim Prieur. Jim?

Thanks, Scott. We're pleased that the third quarter 2008 results showed operating earnings across all of our operating segments. Total operating EBIT exceeded $106 million in the third quarter. Still, the Bankers were up 16% and Colonial Penn had sales growth of 6% over the third quarter of last year. CIG sales were also up 5% over third quarter of 2007. We're also pleased that we again showed positive results in the LTC closed block with GAAP income from operations of almost $3 million. We have now had five consecutive quarters of improved results from this block.

Earnings in Bankers were a good turnaround story for the quarter. A significant improvement in the LTC results was somewhat offset by lower than expected margins in the PFFS business.

As we announced last quarter, Conseco plans to transfer Senior Health Insurance Company of Pennsylvania, formerly known as Conseco Senior Health, and we'll now refer to it as Senior Health to an independent trust. This transfer is subject to regulatory approval by the Pennsylvania Insurance Department and is still anticipated to be completed in the fourth quarter of this year. This is obviously a very significant transaction for the Company moving forward.

The run-off block has been the most significant factor in determining the credit rating of the Company. While there may be other strategic moves that we make, there is unlikely to be any single strategic move in the near term that approaches the significance of transferring the bulk of the Run-off block for a contribution of $175 million.

In Investments, we had impairments and realized losses, which we'll provide quite a bit of detail on shortly. These losses were slightly better than what was experienced by most other insurers as a percentage of assets. In addition, our accumulated other comprehensive loss increased by approximately $500 million during the third quarter, primarily as a result of credit spread widening.

The results for Conseco continue to improve and stabilize. However, this is not as readily apparent with the inclusion of the charges related to the proposed transfer of Senior Health and its LTC business to an independent trust. Third quarter financials include $155 million of charges related to the proposed separation transaction, which will have the effect of reducing the charges to be taken upon completion, probably in the fourth quarter. We are in compliance with the bank covenants and expect to continue to remain so.

There has been a lot of concern and scrutiny on insurance companies recently and on capital and liquidity constraints in light of the owners economic markets that we've seen over the last couple of months. As such, we think it's critically important for us to share with you why we're different than a lot of the others in our sector and why we believe there is not currently a need for Conseco to raise capital.

First, we do not depend on having the highest ratings to make new sales or keep current customers, so our core business tends to be stable during times of economic volatility and ratings fluctuations.

Second, unlike insurance companies that have big blocks of variable life and annuity business, we have virtually no variable business and we have not marketed variable products for years, which means that there are no reduced asset values in revenue streams and no accelerated DAC write-offs with the decline in the stock market.

Unlike insurance companies that sell large policies aimed at asset accumulation, most of our products are sold in small face amounts to protect against financial loss. Large scale withdraws by Conseco customers are, therefore, much less likely. Also, we have not invested many of the exotic securities and derivatives, such as credit default swaps that have caused liquidity problems at many financial institutions. Our impairments and exposures over the first three quarters of 2008 have been lower than most company's in the industry.

And finally, many of the large companies having problems have dynamically hedged the variable guaranteed benefits in equity index products exposures. They're now dealing with the tail of the distribution, requiring increased hedges at higher and higher prices.

As I just mentioned, we have virtually no variable business and we are very simply hedged on our equity index products. We buy one year options to match the one year duration of the participation rates and caps in the products. At the end of the year, we simply reset the participation rate and cap to reflect the cost of buying the hedge for the next year.

Based on all of these factors that differentiate Conseco from other companies, we currently see no need to raise external capital.

While we're fortunate in many respects, we don't take our position for granted. We still believe that the key to our success is straight forward. It's in our ability to deliver on the sound business plans and strategies that we already have in place within all of our Companies.

Next up is our CFO, Ed Bonach, who will take us through the financial

Thanks, Jim. Let me start by covering third quarter 2008 results. Turning to slide 7, collected premiums on the trailing four quarters basis continue to grow. Increases at Bankers and Colonial Penn were partially offset by a slight decrease at CIG, primarily due to the sale of the annuity block in 2007 and a focus on more profitable business at Conseco Insurance Group.

As Jim mentioned, our core segment earnings were strong. As you can see on slide 8, our net operating income of $58.9 million equated to $0.32 per diluted share for the third quarter of 2008, compared to a net operating loss of $21.7 million in the third quarter of 2007 or a loss of $0.12 per diluted share.

For the third quarter of 2008, the net loss applicable to common stock was $182 million, which includes $85.9 million of net realized investment losses and $155 million of losses related to the proposed transfer of Senior Health and its long-term care business to an independent trust. This equates to a net loss of $0.98 per diluted share including $0.46 per diluted share of net realized investment losses and $0.84 per diluted share of losses related to our proposed Senior Health transfer.

Investment losses recognized in the third quarter of 2008 were not reduced by a tax benefit due to the establishment of the deferred tax valuation allowance. It is unlikely that the tax benefits related to investment losses will be utilized to offset future taxable income. We have always established a valuation allowance for capital loss carry forwards.

Turning to slide 9, as we said earlier, the Company had operating income in all four insurance segments, with a small loss recorded in the corporate segment. Year-over-year results show considerable improvement with total segment EBIT increasing to $106.6 million in the third quarter of '08, compared to a loss of $17.4 million a year earlier, which included the loss of $76.5 million related to the annuity coinsurance or sales transaction and $16.4 million of expenses related to a litigation settlement.

In our Bankers Life segment, pretax operating earnings were $67.8 million in the third quarter of '08 compared to $67.5 million in Q3 of '07 and the significant improvement from the first half of 2008 as we had indicated we expected due to management actions taken particularly in long-term care.

Results for the third quarter of 2008 were affected by several other items. Our long-term care products and life margins experienced a positive trend versus the third quarter of 2007. This, however, was offset by lower Medicare supplement margins and lower PDP/PFFS income in Q3 '08 versus Q3 '07.

Earnings were also negatively impacted by approximately $6.6 million related to the FAS 133 impact on equity indexed annuity products. This variance primarily resulted from the change in the value of the embedded derivative related to future index benefits reported at estimated fair value in accordance with accounting requirements.

For Colonial Penn, the pretax operating earnings were $6.5 million in the third quarter of '08, compared to $7 million in the third quarter of 2007. Results for the third quarter of 2008 were negatively affected primarily by a $1.3 million DAC amortization adjustment that is not expected to recur.

In our Conseco Insurance Group segment, pretax operating earnings were $36.1 million in the third quarter of 2008, compared to $18.2 million in the third quarter of 2007. Results for the third quarter of '08 were affected primarily by improved mortality in the interest-sensitive life business partially offset by lower than anticipated specified to these margins. In addition, this segment also experienced a decrease in expenses of $11 million resulting from a significant software write down during the third quarter of '07 and the refocusing of CIG sales and marketing that we completed in the fourth quarter of last year.

The LTC Run-off block was profitable again in the third quarter. In our other business and Run-off segment, we achieved pretax operating income of $2.9 million in the third quarter of '08, compared to a loss of $19.5 million in the third quarter of 2007. These results continue to show the progress we are making towards restoring profitability through premium rewrites, claims and expense management. The corporate segment includes $2.9 million of expenses incurred in the third quarter related to the proposed separation transaction concerning Senior Health.

Net realized investment losses were $85.9 million, which is consistent with what we have seen throughout the industry in the market. Realized losses before related amortization and taxes included approximately $50 million of writedowns 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.

During the third quarter, we recorded $155 million of losses related to the proposed transfer of Senior Health to an independent trust. The loss was comprised of investment losses of $175 million related to the increase in unrealized losses on investments expected to be transferred to the trust, which is partially offset by a net gain of approximately $20 million related to the recapture of some previously reinsured long-term care business to be included in the business transferred to the trust.

Investment losses of $175 million were not reduced by a tax benefit due to the establishment of a deferred tax valuation allowance. And as I said before, it is unlikely that the tax benefits related to these losses will be utilized to offset future taxable income.

Slide 10 details a comparison of actual results versus those released in preannouncement on October 23rd. As you can see, our actual results were at the favorable end of the ranges that were anticipated. Our trailing fourth quarter's operating return on equity, excluding the litigation charges, loss on coinsurance transaction, increased to the deferred tax valuation allowance and losses related to the senior health transfer was 4.4% for the fourth quarters ended September 30, 2008, which improved noticeably from that reported in the previous quarter.

As we have consistently stated, our long-term goal is to improve ROE to 11% in 2009, which we believe is achievable. Turning now to slide 12, net operating income for the third quarter of 2008 was $58.9 million, or $0.32 per diluted share. This compares with a net operating loss for the third quarter of 2007 of $21.7 million or $0.12 cents per diluted share.

The Q3 '08 operating income excludes $85.9 million of net realized investment losses and $155 million of losses related to the proposed transfer of Senior Health to an independent trust. Including these items, results in a net loss applicable to common stock per diluted share of $0.98 for the third quarter of 2008 as compared to $0.28 loss per share in the third quarter of 2007.

In today's volatile markets, maintaining the appropriate liquidity and capital levels is extremely important to our business, as is deploying capital wisely. Our liquidity remains adequate with over $140 million at the Holding Company, including our revolver as of September 30th. While some of the funds will be used as part of the Senior Health transaction, we expect liquidity after the close of the separation transaction to be approximately equal to one year's interest expense on our debt.

During October 2008, we completed some transactions to improve our liquidity and capital position. First, we borrowed $75 million of the funds available under our revolver for additional flexibility and to confirm its availability. Five million dollars of our revolver was not funded.

Second, the Company repurchased $37 million of par value of our convertible debt at a cost of about $16 million. This reduces our debt to equity ratio by approximately a half point and results in a $21 million gain in the fourth quarter of 2008.

Slide 13 details the major 2007 and year-to-date 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 subsidiary, any share repurchases and contributions to the capital of our subsidiaries. We did not repurchase any shares in the first three quarters of 2008.

As we have said in prior quarters, our liquidity at the Holding Company is impacted primarily by the strength of our insurance subsidiaries. Our insurance companies currently are expected to generate approximately $150 million of statutory profits annually, excluding extraordinary items. This is in excess of their capital needs to support ongoing growth.

Following the transfer of Senior Health in its long-term care business to an independent trust, our statutory net income is expected to increase to approximately $200 million annually.

The statutory dividend capacity of the insurance subsidiaries is in the range of $50 million to $125 million annually based on statutory net income of $200 million per year, reflecting again our core earnings power.

In addition to dividends from the insurance companies, the Holding Company also generates cash from interest payments and surplus notes, fees for investment services and fees for administrative services provided to the insurance company.

Last quarter, we announced a plan to transfer Conseco Senior Health Insurance Company (CUSHY) to an independent trust to be named Senior Health Care Oversight Trust for the exclusive benefit of its long-term care policyholders. On October 20th, CUSHY's name changed for the approval of the Insurance Department of Pennsylvania to Senior Health Insurance Company of Pennsylvania or now Senior Health.

To remind everyone, under the terms of this transaction, all of the stock of Senior Health be transferred to the trust including its approximately $3 billion of assets supporting its long-term care business, and Senior Health's $121 million of statutory total adjusted capital to which Conseco will contribute an additional $175 million of capital.

To facilitate the transfer, Conseco formed a transition trust, which has filed Form 8 for regulatory approval with the Pennsylvania Insurance Department to separate Senior Health from Conseco. The public comment period for this transaction ended on September 30th, and responses to comments received have been filed with the Pennsylvania Insurance Department. We expect to receive Pennsylvania's approval of the transaction and close the transaction by the end of the year.

Slide 15 reflects the impact of the proposed Senior Health LTC separation transaction on Conseco's financials. As part of the proposed separation, Conseco expects to record GAAP accounting charges totaling approximately $1.2 billion. Comprised of Senior Health equity is calculated in accordance with generally accepted accounting principles, an additional valuation allowance for deferred tax assets and the capital contribution to Senior Health.

Conseco recorded approximately $504 million dollars of these charges in the quarter ended June 30th, 2008; $155 million in the quarter ended September 30, 2008; and we expect to record the remainder of the accounting charges of approximately $500 million when the transaction closes, which as we said, currently is expected in the fourth quarter.

Turning now to slide 16, as we indicated in our pre-release and on this call, we are in compliance with all of our bank debt covenants and expect to continue to remain so. The approximately half a point improvement in the debt-to-capital ratio from our buybacks of $37 million face value of convertibles in the fourth quarter highlights the positive impact that management actions can have in maintaining compliance with our debt covenants, as well as building back margin.

Slide 17 consolidates several of our more important indicators, as well as showing the pro forma effect of the Senior Health LTC separation. Book value per diluted share, excluding accumulated other comprehensive loss of $20.79 at September 30th, 2008, is down from the year end 2007 value of $24.41.

The pro forma book value is driven by charges from the proposed separation transaction. On a pro forma basis, assuming the separation transaction was completed on September 30, 2008, the book value per diluted share would be $18.09.

Our debt and preferred stock to total capital ratio also calculated, excluding accumulated other comprehensive loss was 24% September 30, 2008, compared to 21% at year end 2007. The 3% point increase is the primarily result of recording $659 million in charges in the second and third quarters related to the proposed separation of Senior Health and its long-term care business. Again, on a pro forma basis, assuming the separation transaction was completed on September 30, 2008 this ratio would be 28%, which is 2 percentage points below our debt covenant level.

Risk based capital in our insurance companies ended the third quarter at 257%. I will touch more on this further in a moment. Our investment portfolio continues to perform within expectations. Net investment income on general account assets for the third quarter reflected an earn yield of 5.91%.

Turning now to slide 18. As indicated earlier, our consolidated RBC Ratio has declined somewhat since year end 2007. The third quarter decline is primarily result of an increase in required capital due to the mortgage experience adjustment factor. Also, the investment markets environment that increased some of the components of required capital and caused us to record certain impairment. We also had increases due to the Senior Health long-term care statutory reserve pivoting and overall business growth.

On a pro forma basis, after the proposed transaction of Senior Health being contributed to the independent trust, Conseco's consolidated RBC is expected to rise, partially to be offset by additional required capital from the mortgage experience adjustment factor. Let me now turn it over to Scott Perry, President of Bankers Life, to cover that segment's results. Scott?

Thanks, Ed. For the quarter, Bankers earnings were much improved over Q2. Importantly, it had what was communicated as an expectation during the second quarter call, and slightly ahead of Q3 '07. During the quarter, we experienced an improvement in the interest adjusted long-term care benefit ratio driven in part by the claims management work begun during the second quarter.

Offsetting this improvement was the impact of FAS 133 accounting treatment for embedded liability options in our EIA lines and lower than expected margin in the PFFS lines. Sales for the quarter, excluding Private-Fee-For-Service, were up 6% over Q3 '07, driven by strong annuity and Medicare supplement sales. Including Private-Fee, total NAP of $66 million is 16% above the second quarter '08, which largely is a result of the timing affect of Private-Fee-For-Service chargebacks during the year.

As we discussed previously, beginning in the second quarter, we took a number of important steps to improve the performance of the Bankers long-term care block. We are now well on our way to completing these steps, which include an assessment of all the key fundamentals that drive this line's performance; enforced pricing, claims management, underwriting and risk selection, and new product design and pricing.

In Q3, we started and completed all state filings for an additional 35% rate increase, affecting 155,000 policies in our legacy block of long-term care, which represents half of the Bankers long-term care business.

A total of $102.5 million in premium increases was submitted, of which we expect to receive approvals of $70 million with an ultimate expected annual financial impact of approximately $50 million. As of this Tuesday, we had received approvals from 14 states for $28.8 million or 41% of the total expected. We have already implemented $27.7 million of those approvals with a projected financial impact of $20.7 million. In addition to round three, we continue to make progress on pursuing over $10 million of in-force premium impact on round two existing files.

During this quarter, we made several important changes within our long-term care claims organization. We completed the realignment of our claims organization into claims subgroups of similar size, span of control, and risk management responsibilities. With the support from the long-term care group, we introduced best-in-class protocols that are now being applied by all of our claims personnel.

Simultaneously, we worked on process improvements to eliminate inefficiencies, improve cycle time, and improve customer service levels. We are very pleased with the strong progress we achieved during this quarter and are optimistic on the continued positive impact they will have in the fourth quarter and beyond.

During the third quarter, we also prepared for the introduction of the EMST, or Enhanced Memory Skills Test, to be used with home healthcare applicants. This is an important tool used during the underwriting process to detect cognitive impairments. We began using this tool for home healthcare applicants in early October.

Finally, regarding product improvement in long-term care, we continue to make progress on the updated version of our existing stand-alone long-term care product and the long-term care annuity combo product that will be introduced in the first quarter of '09.

Reiterating what we mentioned during the last call, while we expect all of these actions over time to improve the Bankers long-term care performance, clearly claims management and in-force premium [re-rates] are and will continue to provide the fastest and most noticeable improvements over the immediate upcoming quarters.

This slide provides a high level comparison and illustrates some important distinctions between the Bankers long-term care business and Senior Health closed block of long-term care business. The Bankers block is more homogeneous, as it has significantly fewer policy forms. This shortens the period of time to file and capture re-rates. For example, beginning in August and concluding in October of this year, the entire $103 million of rate increased filings were completed.

The relative simplicity of this block also speeds up the implementation of new protocols and process improvements in our claims organization. It should also be noted that the Bankers block presents a significantly lower overall risk profile as evidenced by a low number of policies with zero day elimination and lifetime benefits.

Turning to slide 24, during the quarter, Bankers surrender rates on both EIA and fixed annuity blocks were well below third quarter 2007 levels. It is important to note, nearly 90% of our total annuity block remains in the surrender period. Surrender activity was relatively stable and consistent with our expectations. In comparison to the second quarter of '08, on the EIA block, surrenders were approximately 9.8%, compared to 8.6%. And on the non-EIA block, surrenders were 10.7%, compared to 10.5%.

Turning to slide 25, total sales were up 16% when compared to the third quarter 07. Sales in Q3 '07 were adversely affected by the processing of a backlog of Private-Fee-For-Service chargebacks. This processing is now completed in a more timely manner. Excluding Private-Fee-For-Service, sales were up 6%, with very strong sales of annuities up 30%, as we see market conditions prompting consumers to look for the safety, stability and security fixed annuities provide.

We also saw gains in Medicare supplement sales of 3%. Slightly offsetting these gains were decreases in life sales of 5% and long-term care sales of 2%.

Our distribution fundamentals remain strong. Both total agent force size and agent force productivity grew during the quarter. Productive agents grew 6%. New agents grew 12%. And on a year-to-date basis, total agent force size is up 8%. Current economic conditions are not impacting our ability to recruit and retain agents.

Finally, our top line is measured by NAP. Excluding Private-Fee-For-Service, continues to gain momentum with fixed annuities and Medicare supplement sales leading the way. We believe current market conditions place healthcare, financial security and protection products in a favorable light and do not expect sales to be negatively impacted by the current economic downturn. As a leading indicator of this, we continue to see improvements in the agency forced metrics that drive our growth and will strengthen our position as the leading provider of health and financial security to middle America's pre and post retirees.

Lastly, here we see the impact of the earnings items previously discussed producing an ROE on a trailing four quarters basis of 7.6%. However, this result is heavily influenced by the non-typical sub-par results experienced during the first half of '08. Assuming annualized performance consistent with Q3 results, which are more in line with our expectations, an ROE of just over 12% is achieved. I will now turn it back over to Ed to cover Colonial Penn, CIG, and the long-term care closed block. Ed?

Thanks, Scott. Turning to slide 28, Colonial Penn's sales is measured by new annualized, premium or net increased 6% from the third quarter of '07 with substantially all of this growth arising from our life insurance marketing campaigns. Sales in the quarter were in line with our expectations, recognizing that we had to compete with the election advertising. Year-to-date sales are up 32% and core product sales are up 19% over the same period last year.

Turning to slide 29, Colonial Penn segment earnings are down 7% from last year's third quarter. The decrease from the prior year is primarily due to a DAC amortization adjustment of approximately $1.3 million, which was partially offset by higher life margins as a result of the fourth quarter 2007 reinsurance recapture and the 2008 sales expansion efforts.

Trailing four quarters operating return on equity of 8.4% is depressed due to market expansion investments made in the fourth of 2007, and first quarter of this year. Colonial Penn's annualized ROE based on the third quarter 2008 results is 12.8%.

CIG's overall NAP sales, as shown in slide 30, were up 5% from the third quarter of 2007, again with strong sales gains of 25% of specified disease, offset by decreases in Medicare supplement and annuity sales. While CIG sales are slightly down for the year, 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.

Improved mortality and reduced expenses drove earnings improvements in the third quarter compared to the prior three quarters. We expect earnings to be positively impacted going forward as we seek to restore margins through changes in non-guaranteed elements with some of our older life insurance policies.

Slide 31 illustrates the significant changes in CIG sales mix compared to the third quarter of 2007. Continuing a trend, sales rose by 25% 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 competing MedAdvantage or Private-Fee-For-Service products.

The increase in third quarter 2008 earnings from third quarter 2007 is primarily attributable to higher life margins and lower DAC amortization, as well as lower expenses. These improvements were offset somewhat by the increase in specified disease incurred claims and increased Medicare supplements claims. Let me also remind you that the third quarter 2007 results included profits from certain annuity blocks, which were subsequently reinsured during the latter part of 2007. CIG's annualized third quarter 2008 return on equity was 4.4%.

As we discussed earlier, in August we announced a plan to transfer the long-term care business of Senior Health to an independent trust. The plan would transfer all of Senior Health's long-term care business, or approximately 85% of the business in the closed block. This increases Conseco's ability to focus on its active businesses.

Preparations for this planned separation are progressing and we await the pending approval by the Pennsylvania Insurance Department. We continue to expect to complete that transaction, as we said before, in this quarter.

Our financial results for the quarter reflect the fifth consecutive quarter of stability. Results for the quarter were driven by the continued favorable development of reserves and the turnaround program of premium re-rates, claims management, and expense efficiencies.

These improvements have led to profits for both the quarter and for the year-to-date. In addition, during the third quarter, we recorded a net gain of approximately $20 million related to the recapture of a previously reinsured long-term care book of business, which is recorded in the $155 million of losses related to the proposed transfer of Senior Health to an independent trust.

Turning to slide 34, results for the quarter, excluding the recaptured gain, were $2.9 million of profit, a $22 million improvement versus the $19.5 million loss in the prior year.

In summary, the third quarter results mark a fifth consecutive quarter of stabilization and a profit year-to-date. We look forward to regulatory approval of the plan to transfer Senior Health into an independent trust and are prepared to begin separate operations in the fourth quarter. Now, I will hand it over to Eric Johnson, our Chief Investment Officer, who will discuss the CNO investment portfolio. Eric?

Thanks, Ed. Good morning, everyone. For the third quarter, investment income increased to $359 million from $356 million in the second quarter. That represented an earned yield of 5.91%. The increase in yield and income can be attributed to growth and assets and in wider credit spreads.

Looking at slide 35, that shows our below investment grade allocation, which remains satisfactory at approximately 6%. The credit cycle will continue to pressure this ratio, which has been historically fairly consistent, in the coming quarters. Our intent would be to keep this ratio in its current range.

Moving to slide 36, we recognized approximately $225 million in gross impairment losses in the third quarter. This included $175 million, approximately, related to the Senior Health transaction, and approximately $50 million largely from 12 corporate credits. Lehman and Washington Mutual represented over $20 million in aggregate.

Going to slide 37 shows. Slide 37 shows our exposures to Lehman, AIG, and Washington Mutual as of 9/30/08. You'll all recall that we distributed a press release on September 16th, which detailed our exposures to these credits. Our net realized losses in the quarter were $45.7 million. This included $41 million related to Lehman and WaMu. As these numbers indicate, Lehman/WaMu really impacted our results in the third quarter. They'll probably not have a similar effect on future quarters.

Moving to slide 38. Slide 38 summarizes our net unrealized position at September 30. As risk spreads have widened during the year, our unrealized losses widened symmetrically from approximately $500 million at year end to approximately $2.1 billion at September 30. Really, no sector of the markets and really, not any sector of our portfolio has been immune from this widening. Particularly in the third quarter, corporate spreads widened appreciably following on a lot of widening and structured products during the first couple of quarters, and really it was corporate spreads that represented the bulge of the change in the third quarter.

Moving to slide 39. Slide 39 lays out our structured securities portfolio. This is former presentation, which you've all seen before a couple of times here. This allocation remains very highly rated over -- it's approximately 90% AAA and that includes our subprime exposure of which I will say more in a second.

Slide 40 gets into subprime, again a form you've all seen before, and it shows that we've continued to reduce this exposure. It's now approximately $90 million -- $95 million, excuse me, which is less than a third of what it was a year ago.

Going on to slide 41, a little more detail about subprime here. It represents 33 basis points on a total portfolio at market value.

During the third quarter, delinquency trends and severities continue to be unfavorable in the market as a whole, which impacted our portfolio not withstanding, which we remain satisfied with the performance of our collateral, and would expect to season this out and receive the cash flows that are on the books today.

Going to slide 42, which gets into Alt-A. Our exposure to Alt-A securities is $584 million, which is approximately 2.7% of invested assets. This portfolio is very highly rated, 99% AAA, most of which are super-seniored.

Alt-A securities have experienced in recent quarters much higher than expected -- or much higher than, at least, historical delinquencies and a high degree of liquidity in this market. Our Alt-A portfolio has very good -- better than average qualitative characteristics, but it certainly reflects substantial market to market declines, which have been common in the sector.

I've had a couple of calls recently with people asking me if there are any particular securities in our portfolio that might be candidates for some of the government programs. And one thing I mentioned here is that we, in the Alt-A area particularly, will be keeping a close eye on what the government programs do with respect to buying in securities and this might be one area that will get some attention.

Going to the next slide, which is about CMBS. Our CMBS portfolio is about $930 million, it's about 4% of invested assets. Again, a very highly rated portfolio, 70% plus in the AAA and AA categories. Our collateral's performing very well, low delinquencies, significant credit support. Obviously, this is an area where there's been a high degree of spread wide widening led by derivatives, but also affecting cash, and it's really generated a cycle in unrealized loss, especially on triple Bs.

Our forecast in the commercial mortgage space generally is for rise in delinquencies and probably higher severities for the market as a whole, which may well impact our portfolio as well. But we do believe in the long run, this portfolio will season out well and produce the earnings in cash flow that we originally expected and continue to expect today.

Stepping back a bit, as a general comment, while this credit crisis appears to be following somewhat in terms of access to liquidity, and particularly, at the short end and for higher quality borrowers. Volatility is still high and there are still days like yesterday.

The economy appears to be facing a fairly cold winter and probably will pressure consumers and corporates. I believe that, not withstanding this, we will meet our objectives for income and yield this year and next year, but volatility will certainly persist and will probably lead to continued impairments in the near term. And with that, I'll turn it back to Jim Prieur.

Thanks, Eric. In the third quarter, the Company has shown again that it can profitably grow at a very attractive rate. Bankers and Colonial Penn had good sales growth and as we forecasted last quarter, CIG sales showed positive growth as the year-over-year comparisons did become easier.

Of course, CIG sales are also of a much higher profit margin products, so the contribution to profit from new sales is increasing.

Profitability from ongoing operations was also much improved from the first half of 2008, as Bankers Life earnings reverted to being well over $60 million per quarter. As we mentioned in the last call, we know how to fix the LTC business. In Bankers LTC business, it is much easier to fix then the old Run-off block of business. PFFS earnings were a little disappointing, but overall Bankers earnings fine, even with the negative accounting impact from equity index volatility on EIA margins.

Management is very focused on improving shareholder value. A brief comment on the value of the shares. These are extraordinary market conditions; bank failures, government interventions, historically wide credit spreads, and frozen capital markets. In the middle of all of this, Conseco now trades at less than two times earnings. This is an incredibly low valuation.

At peaks in markets, you frequently see the expression being used that some shares are priced for perfection. At less than two times earnings, Conseco is now priced at the very other end of the valuation spectrum.

The Company has a strong franchise in the consumer senior middle market with more than 4 million policyholders. It sells straight-forward products to a underserved market, a market segment that is growing faster than the overall market. We don't have a lot of stock market exposure, which others in the industry do have. Nor do we have any likely run on the bank risks that some of our highly rated competitors have.

After the proposed Senior Health separation transaction, we will be much closer to covenant levels in our bank facility. Therefore, not surprisingly, we're spending quite a bit more time on capital management.

But, through this separation transaction, we also will have removed the greatest source of volatility in our earnings. Even in the third quarter of 2008, an historic quarter for US capital markets; a quarter where the domestic debt market had multiple, significant credit failures. The Company's earnings before interest and taxes exceeded the recognized losses in the quarter.

Now that the proposed Senior Health separation transaction is almost complete, the Company will be focused on running its unique middle market franchise. We will be continuing to work on sales growth, continuing to make the business more efficient and continuing to work on moving towards the 11% ROE target by year end 2009. So, in this upcoming year, our attention will be focused on the execution of operational plans. And now we'll open it up for questions. Operator?

(Operator Instructions) Your first question will come from the line of Randy Binner with FBR Capital Markets.

Hi, everyone. Just wanted to clarify something with the key debt covenant slide, page 16 of the presentation. It looks like on a statutory capital requirement that on a pro forma basis that goes to $1.314 billion. I just wanted to kind of clarify that. That's something, when we've talked about the capital buffer to the debt covenants, it seemed there was more focus on the debt to capital ratio before. But that margin on stat capital looked to be thinner.

So, I just would like to get more color on how you're comparable with that, given the credit environment and potential losses coming through. And then, I guess the answer is going to include the stat dividend upstream ability and the other sources and uses of funds. But really I just like to see more -- get a more color and more confidence that there'll be an adequate buffer pro forma, given the credit environment.

Thanks, Randy. This is Ed. Yes, definitely part of the answer is the statutory earnings power of our core businesses, which again is approximately $200 million annually after the separation of Senior Health. Secondly, we do anticipate, as we indicated, having liquidity at the Holding Company in excess or approximately in the range of one year's debt service. That does not prohibit us from contributing capital to the insurance companies, if needed.

Thirdly, as we have talked before, there are other things that we can do to manage our capital, as indicated on the debt to cap and buying back convertibles, but more specifically, reinsuring books of business that freeze up required capital, as well as generating actual extra capital through a seating commission.

And with our Bankers long-term care business, we continue to look to reduce our exposure there. As even with the separation of Senior Health, we believe we are overweighted from a risk standpoint for a company of our size. And to the extent that we do reinsure some of the Bankers long-term care business, that again would free up capital, generate cash through a seating commission.

Great. Just two quick follow-ups then. So, it sounds like you feel that Bankers Life would have a bid, if you will, in the reinsurance market. Where someone would pay a seating commission given, I guess, improved results in long-term care.

And then the second follow up and then I'll drop off. Is that the one year debt coverage? There's a couple different interest expense things that run through the models and presentations. Can you quantify that one year coverage? Is it somewhere in the range of $80 million to $100 million? Thank you.

Thanks, Randy. Definitely there are top line reinsurers that are in the business of reinsuring long-term care and I think, as we mentioned in prior calls. The two quarters of this year, the first two quarters where Bankers long-term care underperformed, reinsurers have a longer term view. And while those two quarters would certainly be considered, they didn't make or break a transaction. So certainly having a third quarter back in line with what we expect longer term in this business doesn't hurt, but they do take a long-term perspective in that. And as far as your other question, could you repeat that please or --

Interest coverage in --

Just a quantification of interest coverage.

The interest coverage test is an unconsolidated test. So its in Conseco, Inc. by itself. So, it's fairly simple test to meet and to calculate.

It's not on a consolidated basis, it's on an unconsolidated basis within CNO, Inc. The Holding Company by itself. So, it's relatively easy to meet that test.

Is it possible just to quantify it, so we know that we're all talking about the same number?

I think it's shown on the slide, isn't it?

I just wanted to be sure. There is different interest items that moved through. I just wanted to clarify that it was in the range of $80 million to $100 million.

Well, that's not exactly the number that goes into this calculation, but it's in that neighborhood. We'd be glad offline to walk you through that calculation.

Fair enough. Thank you.

Your next question from the line of Jukka Lipponen with KBW.

Good morning. Couple of questions. First of all, in your Alt-A portfolio, what level of credit or how much credit support do you have there on average?

Hi, Jukka Lipponen. This is Eric Johnson. Good morning. On average, you're looking at -- well, it varies because, again, these are super-seniored securities. So, inherent in the collateral will be 8% to 10% support and then with structural, in terms of a waterfall, you might get up into the 20s to 30s.

Okay. And in your AOCI balance, can you break down how much of that would be interest rate marks versus credit marks?

I can. In general, as you'll remember, our portfolio was largely mark to market at the point of the Company's emergence from Chapter 11. The yield curve at that time was in a slightly -- was also low, as it is today, but it was differently sloped. Having said that, and just kind of speaking generally, the great bulk of today's unrealized is driven by credit spread and risk premium, as opposed to interest rate movement, from that point in time.

It particularly, interestingly enough, just the way the arithmetic works, it affects every segment of the credit curve, really the great bulk of it is driven at the higher end of the credit curve, not at the riskier end. Because, at that time, high grade spreads were extremely tight. Therefore, over the course of the year and particularly in the third quarter, as you've seen A and AA spreads really blow out to unprecedented levels, that has been a major driver in this calculation.

You're talking about credits of that are no-story type credits. Where you've got spreads widened by a factor of 8 times and 10 times. And so, consequently, you're going to have large exposures with much wider spreads, which drives large arithmetic amounts of unrealized loss.

And can you remind us, what would be sort of the normal range of quarterly fluctuation for the mets up and the specified disease benefit ratios, and in the PDP and PFFS benefit ratio, was there any prior period reserve development in that number?

You could -- for both of those benefit ratios on a quarterly basis fluctuating plus/minus two to three points is within the typical range. There was not any prior period adjustments in the PFFS.

And lastly to Jim Prieur. Jim, your book value per share exAOCI is well under $15, x the NOLs, if I did my math correctly at the end of the quarter. And so to hit an 11% ROE target '09, would mean based on that number that you have to earn about $1.60 a share. Can you comment on that -- is that what we should be thinking about it or how should we be thinking about it?

Yes, actually, it's even easier than that in the sense that -- I mean, now. On a pro forma basis, post the separation of Senior Health, the book value per share will be around $12.05. So an 11% return is a $1.30 something, $1.35 or so?

Okay. Thank you.

Your next question will come from the line of [Paul Sarran] with FPK.

Couple of quick questions on the investment portfolio and then one real quick one on benefit design. On the investments, I wanted to ask why -- what's the justification for contributing any new money to below investment grade securities?

Also, WaMu, if I'm reading this right, was only marked down to 50%. I think I've seen other people mark it down a lot more. And then, I want to ask if you can give any sense of maybe your single top five or top ten biggest single exposures outside of government or agency?

This is Eric Johnson. I didn't hear your question on benefits. I wouldn't be the guy to answer that one, anyway. But I can at least take a shot at two out of your three investment questions, and the third I'm going to say, I don't know that we'll disclose it. The one I'm going to say I don't know that we disclose is the listing the top five or ten or whatever credits. I probably could tell you that actually off the cuff, but I don't think I'm supposed to.

On the other ones, though, on the Washington Mutual bonds. As you know, it's a somewhat complex capital structure. And interestingly enough, the bonds that we held at 9-30 that you're referring to were the Holding Company's senior notes. They actually traded $0.60 something cents on the dollar. We actually sold all of ours at $0.60 something cents on a dollar. So if they were marked at 50%, that reflects that they were marked appropriately.

So, moving on to the other question you asked about what the justification for put money to work in high yields. I could answer it a lot of different ways. But in my earlier comments, what I was really referring to was the fact that in the current credit environment, there are bonds that are being downgraded that are formally investment grade credits that are migrating down the credit curve. That's going to happen to some degree.

So, I think it would be misleading for me to say that the ratio of downgrades and upgrades is probably going to stay really favorable. It's maybe going to be a little unfavorable. So, we are going to have to manage that and work with that and hope we've made good choices historically that will weather this cycle. But that cycle is going to occur. Not withstanding that cycle, I do think a couple of further comments.

We will try to keep the current ratio roughly where it is, but it will be under some pressure. And next, there will be from time to time some small amount in absolute number of noninvestment grade credits that offer good value that probably we would be smart to invest in. Just like everybody else. And I think that will happen. But I don't think it will be a huge factor in moving the needle on this ratio. I think the predominant factor will be the downgrades and that's what I was referring to.

Paul, this is Ed. Let me also add on WaMu. We did have some holdings downstream from the Holding Company that were impaired to a much lower value than the $0.50 or $0.60 that Eric mentioned as far as the Holding Company of securities.

Okay. That's helpful. On the top exposures, I think, if this is something you can disclose later today or going forward, even if it's amounts and industry and not necessarily specific companies, that would be helpful. One benefit design question was, can you give any description of common or typical designs on the equity indexed annuities as far as cap rates, credit rates, anything like that? Thanks.

Two things, on the exposures, in our cue, we do, by industry, disclose our holdings, so hopefully by referring to that, at least you will get a little more insight into our investment portfolio. As far as the indexed annuity products, ours are straight-forward. We go on annual point-to-point largely. There are a lot of variations out in the marketplace that have multiple indices go even over more than one year.

Some are daily types of marks and we -- because of the market we serve in the senior middle market, simpler is better, straight-forward is better, and that really does, I will say, influence strongly our product design relative to other products that might be out there in the marketplace.

That's very helpful, thanks.

Just to follow-up on your question about the listing of the names. I think one thing I would say, in general, is that we do tend to have a fairly diversified portfolio. And if you listed all the larger corporate names that we invest in, I will tell you that today, as a result of some of the -- I know that you call them mergers or forced weddings or whatever you call them in the banking sector -- some of our larger exposures would be fairly well-known financial institutions.

But the largest of that would be probably 70 basis points of our portfolio would be the very largest. There would be very, very few names at that scale of exposure. I think that gives you some -- at least, though perhaps not what you're looking for, some sense that is not huge allocations to individual names for the most part.

Okay. Thanks.

At this time there are no further questions.

Thank you, Operator. Thanks to everyone for being on the call and thank you for your interest in Conseco. We continue to be focused on the senior middle market in America, the fastest growing major segment in the market. We have a unique sales machine dedicated to this market, whether it's through agents, direct or through brokers and we're committed to growing this business successfully in the future. Thank you very much.

This will conclude today's conference call. (OPERATOR INSTRUCTIONS)