CNO Financial Group Inc (CNO) 2009 Q1 法說會逐字稿

Good morning. My name is Adrienne, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2009 earnings conference call. All lines have placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions). Thank you.

Mr. Scott Galovic, you may begin your conference.

Thank you, operator. Good morning, and thank you for joining us for Conseco's first quarter 2009 earnings conference call. This morning'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'll also have several other business leaders available for the question and answer period.

During the call, we'll be referring to information contained in this morning'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'll also be referring to a presentation that can be obtained and viewed from the company's website. This presentation was filed in a Form 8-K this morning. We'll file our Form 10-Q for Q1 2009 later this week, and it will also be available through the Investor 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 the this morning's press release for additional information concerning the forward-looking statements and related factors. The presentation to which we'll be referring today contains a number of non-GAAP measures. These measures should not be considered as substitutes for the most directly comparable GAAP measure. The appendix to the presentation contains a reconciliation of the GAAP measures with the non-GAAP measures.

Now I will turn the call over to Conseco's CEO, Jim Prieur. Jim.

Thanks, Scott. We were very pleased that the first quarter 2009 results again showed considerable improvement in operating earnings in all of our segments. Total earnings before interest and tax exceeded $72 million in the first quarter, up 46% over the first quarter of 2008. Also net income of $24.5 million is significant in these challenging financial markets. As we noted last year at this time, first quarter earnings are typically weak, mostly due to Bankers Met Advantage, but also due to mortality across all of our businesses. Seasonally adjusted, first quarter earnings should normally be less than 20% of annual earnings.

Overall, new core business volumes in the first quarter were up 4% over the first quarter of 2008. An increase in core sales at Bankers of 9% was offset by a decrease in Colonial Penn core sales of 4% and a decrease in CIG sales of 8%. Trailing fourth quarter collected premiums in the first quarter of 2009 were up 12% over the first quarter of last year. The company's also pleased to report record recruiting results both at Bankers and at CIG.

In the Bankers segment, we had 22% year-to-date growth in new agents, representing a record setting quarter for agent recruiting. CIG also reported a record quarter for recruiting with PMA agent count up to 477 and with an increase in average agent production. In addition, CIG signed 52 new IMOs during the quarter and new producing workset agents increased by 61% over the first quarter 2008 to a total of 358. Obviously an increase in recruiting bodes well for future business volumes.

There were net realized investment losses for the first quarter of 2009 of $6.9 million, net of related amortization and taxes and the establishment of a valuation allowance for deferred tax assets related to such losses. This figure included $85.1 million of net gains from the sales of investments, net of $92 million of other than temporary impairment losses recognized in earnings, including losses from sales of investments after the end of the quarter. Total other than temporary impairment losses for the first quarter were $108.1 million, of which $92 million was recorded in earnings and $16.1 million was recorded in accumulated other comprehensive loss in accordance with new accounting guidance. Our accumulated other comprehensive loss increased slightly by approximately $70 million during the first quarter.

We continue to generate solid operating earnings. On that note, I would also like to comment quickly on expectations for the earnings power of the company. There is quite a bit of seasonality in Conseco's earnings. Some of this has not been visible or that visible in the past, when earnings were overshadowed by reserves strengthening and remediation charges. Med Advantage and PDP have quite a bit of seasonality to them, and in addition there tends to be higher mortality on life products in the first quarter of 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. While that's true for the whole company, it is particularly true for Bankers given their business mix, and there you might expect about 17% of their earnings to be generated in the first quarter.

If you take the earnings actually recorded by Bankers and adjust it for seasonality and then take out the nonrecurring effects, it suggests that earnings will be in the high $60 million range per quarter. Similarly with CIG, it suggests earnings of between $30 million and $40 million per quarter, and at Colonial Penn, something over $6 million per quarter. Book value per share excluding other comprehensive loss increased $18.57 at March 31, 2009 from the year end 2008 value of $18.41.

Turning to slide 6, collected premiums on a trailing four quarters basis continue to grow, with the growth accelerating in the most recent quarters. Increases at Bankers and Colonial Penn were partially offset by a slight decrease at CIG, primarily due to the focus on more profitable business.

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

Thanks, Jim. Let me start by covering first quarter 2009 results.

As Jim mentioned, our core segment earnings continue to improve. As you can see on slide 7, our net operating income of $31.4 million equated to $0.17 per share for the first quarter of 2009 compared to net operating income of $20.1 million in the first quarter of 2008 or $0.11 per share. For the first quarter of 2009, net income applicable to common stock was $24.5 million, which includes a loss of $6.9 million of net realized investment losses compared to a net loss of $7.2 million in the first quarter of 2008, which included $27.3 million of net realized investment losses in income related to discontinued operations. This equates to net income of $0.13 per share, including $0.04 per share of net realized investment losses in the first quarter of 2009 compared to a net loss of $0.04 including $0.15 of net realized investment losses in income related to discontinued operations in the first quarter of 2008.

Turning to slide 8, as we said earlier, the company again had operating income in the three insurance segments, with a small loss recorded in the corporate segment. Year-over-year results show improvement, with total segment EBIT or earnings before interest and taxes increasing the $72.3 million in Q1 of 2009 compared to $49.4 million a year earlier. In our Bankers Life segment, pre-tax operating earnings were $44.7 million in the first quarter of 2009 compared to $29.1 million in the first quarter of 2008. Results for the first quarter of 2009 were primarily affected by an increase in earnings of approximately $11 million from the long-term care block primarily resulting from recent rate increase action. We also had an increase of earnings of approximately $5 million from equity indexed annuities, an increase in earnings of approximately $5 million also from fixed annuities primarily resulting from lower surrenders, and a decrease in earnings of approximately $6 million from Medicare Supplement primarily resulting from higher benefit ratios.

In our Colonial Penn segment, the pre-tax operating earnings were $5.1 million in the first quarter of 2009 compared to $3.7 million in the first quarter of 2008. Results for the first quarter of 2009 were primarily affected by favorable mortality and overall business growth.

In our Conseco Insurance Group or CIG segment, pre-tax operating earnings were $31.2 million in the first quarter of 2009 compared to $23.3 million in the first quarter of 2008. The most significant factors affecting the segment's earnings in these periods included an increase in earnings of approximately $8 million in the first quarter of 2009 when compared to 2008 due to a negative unlocking adjustment made in the first quarter of last year. There is also an increase in earnings of approximately $5.5 million from specified disease and Medicare Supplement, primarily resulting from favorable development of year end claim reserves, and a decrease in earnings of approximately $3 million in the first quarter of 2009 due to increased surrenders of certain equity indexed annuities with market value adjustment features which have the effect of reducing related surrender charges in a low Treasury interest rate environment.

The corporate segment, which includes our investment advisory subsidiary and corporate expenses, showed a loss of $8.7 million which is slightly higher than the first quarter of 2008 loss of $6.7 million. Corporate interest expense decreased to $13.7 million from $18.5 million in the first quarter of 2008, primarily as a result of lower LIBOR rates. As previously reported, we completed an amendment to our credit facility on March 30, 2009. We incurred fees and expenses of $9.5 million in conjunction with the modifications, which were expensed in the first quarter of 2009.

Effective April 1, 2009 with our credit facility amendment, there is a 2.5% LIBOR floor and a 500 basis points spread over LIBOR on the senior term note. We recognized total other than temporary impairment losses of $108.1 million in the first quarter of 2009, of which $92 million was recorded in earnings and $16.1 million was recorded in accumulated other comprehensive loss in accordance with accounting guidance.

Net realized investment losses in the first quarter of 2009 of $6.1 million net of related amortization and taxes and the establishment of a valuation allowance for deferred tax assets related to such losses included $85.1 million of net gains from the sales of investments, net of $92 million of other than temporary impairment losses recognized in earnings, including losses from sales of investments after the end of the quarter. Such net realized investment losses included deferred tax valuation allowance of $2.4 million, as it is more likely than not that tax benefits related to investment losses recognized in the first quarter of 2009 will not be utilized to offset future taxable income.

Net realized investment losses in the first quarter of 2008 of $27.8 million net of related amortization and taxes included $41.3 million of writedowns for securities we determined were subject to other than temporary declines in market values. Eric Johnson, our Chief Investment Officer, will address this in more detail later in the presentation.

As we reported last quarter, GAAP accounting requires the transfer of the stock of Senior Health to be reported as a discontinued operations in financial statements presented after November 12, 2008. As a result, all Senior Health business previously included in our other business and runoff segment is now reported as discontinued operations. Non-Senior Health long-term care business as well as a small amount of health business which were both previously part of the runoff segment have been collapsed into the Bankers and CIG segment results for reporting purposes.

Our trailing four quarters operating return on equity, excluding increases to the deferred tax asset valuation allowance and losses related to the Senior Health transfer, increased to 6% for the four quarters ended March 31, 2009. The increase from Q4 2008 is primarily due to increased operating earnings and a lower equity base overall due to investment losses sustained over the last three quarters.

Turning now to slide 10, net operating income for the first quarter of 2009 was $31.4 million or $0.17 per share. This compares with a net operating income in the first quarter of 2008 of $20.1 million or $0.11 per share. The Q1 2009 operating income excludes $6.9 million of net realized investment losses. Including these net realized investment losses results in net income applicable to common stock per share of $0.13 for the first quarter of 2009 as compared to a $0.04 loss per share in the first quarter of 2008. I would remind you, as Jim spoke to earlier, that when looking at quarterly earnings for Conseco, it is important to keep in mind the seasonality of our business.

Slide 11 details out the primary financial covenants which reflect the changes as a result of the credit facility amendment dated March 30, 2009. As a quick reminder, the amendment provides for relief on the financial covenants for the period of March 31, 2009, through June 30, 2010, at which time they will revert back to the levels applicable prior to the amendment, which you can see in the 4Q 2008 call. Our bank covenant debt to total capital ratio, calculated excluding accumulated other comprehensive loss, reduced slightly to 27.9% at March 31, 2009, compared to 28.3% at year end 2008.

Risk based capital at our insurance companies ended the first quarter at 230%. I will touch on the changes in RBC during the quarter in a moment. Please note this surplus level is nearly twice the company action trigger level of 125%, which really addresses solvency and is significantly above the covenant minimum of 200%. Note that we have also detailed out our margin for adverse development from March 31, 2009 levels on each of these covenants.

There have been several questions regarding our plans to deal with the convertible debentures which come due in September 2010. A financial advisor for the senior secured lenders has been chosen. The data and information exchange and analysis will begin shortly. Working with the senior secured lenders on alternatives beyond those currently allowed under the credit agreement is an important part of our capital plan. We will continue to evaluate and pursue strategic moves to bolster our capital position going forward.

Our overall liquidity improved during the first quarter with approximately $104 million at the holding company as of March 31, 2009. In April, we repaid the remaining $55 million outstanding on the revolver. As you hopefully recall, we drew on the revolver to confirm its availability last fall. We did not need it for ongoing operations and repaid it to reduce interest expense. Our 2009 liquidity projection has been updated to reflect the additional debt servicing cost following the amendment to our credit facility along with other refinements.

As you can see on slide 12, our projected December 31, 2009 cash balance at the holding company is over $73 million. One additional item of note is that $21.2 million of cash operating expenses incurred in Q1 of 2009 includes $9.2 million of cash costs related to the amendment in the credit facility.

As indicated earlier, our consolidated RBC ratio has declined since year end 2008. The change from our year end 2008 RBC ratio was impacted by several different factors. Positively impacting the ratio during the quarter was the first quarter statutory operating results and the termination of group PFFS cases. Offsetting these positive improvements were an increase in required capital due to the investment markets environment that increased some of the components of required capital due to bond down grades and caused us to record certain impairments, the final phased in increase of the mortgage experience adjustment factor, along with dividends and interest paid to the holding company.

Slide 14 is a waterfall chart showing the major positive and negative impacts to RBC for the period March 31, 2008 through March 31, 2009. As one would expect given the current economic environment, investment losses and valuations have been the largest contributors to the decrease in our RBC ratio over the last year. Capital losses, impairments, rating downgrades, and the effects of the mortgage experience adjustment factor have resulted in a 116 percentage point reduction in our RBC ratio. Unfortunately, these negative factors overshadowed the positive impacts of several of management's actions and the operating income of our insurance subsidiary.

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 $44.7 million, which was higher than the prior year of $29.1 million, a 54% improvement. The main drivers positively affecting earnings were higher long-term care margins due to rate increase activity, which began in the fourth quarter of 2008; higher annuity margins due partly to FAS 133 impacts and lower surrender levels; and higher investment returns on our COLI program. These gains were offset by lower Med Sup margins due to a higher benefit ratio. However, we did benefit from better persistency in the book.

Our core sales for the quarter were $60.4 million, which was up 9% over the same period last year. Bankers also had a record agent recruiting quarter, with new agent contracts up 22% over the prior year. More details on our sales performance are on the next slide.

The first quarter was highlighted by a strong sales of annuities, up 33% over the prior year. We are continuing to see a shift in sales between equity indexed annuities and fixed annuities as consumers look to the stability and security fixed annuities provide. We also saw sales gains in Med Sup and Life Products versus the prior year, both up 8%. Offsetting these gains was a decrease in long-term care sales of 20%.

During the first quarter, our private fee for service sales had been negatively impacted by the following. One, the new CMS marketing restrictions have impacted gross submissions. Two, during 2009 we have changed our sales recognition process to reflect 60% of sales and will true up this number after the 90-day rapid disenrollment period. This is being done to avoid the large chargebacks we experienced in 2008 and smooth out sales recognition. This will be occurring throughout the year. It is important to note we are experiencing fewer than expected disenrollments due to an improved enrollment process.

Moving on to our 2009 sales and distribution results, as I mentioned earlier, the first quarter was a recordbreaking quarter for new agent recruiting, with new contracts up 22% versus the prior year. We are now knocking at the door of hitting a total average agent force of 5,000, which would also be a new milestone for Bankers. In fact, as of March 31st we finished the month with over 5,100 total agents. As far as productive agents, we did see a decline of 8% in total, attributable to the dual impact of significantly more new agents along with the decline of Med Advantage sales. However, the number of productive veteran agents grew by 4% versus the prior year.

I would also like to comment on the Coventry announcement to not file private fee for service for 2010. In short, we do not expect this to disrupt distribution. It is important to note the following. First, we are currently in discussions with potential partners to augment Coventry for Med Advantage offerings in 2010. We expect to provide enhanced availability of network-based plans nationwide. Second, Bankers agents control the relationships with existing private fee for service members and will be able to offer these customers multiple solutions, including Bankers Medicare supplement. Contractually, our Med Advantage partners are prohibited from making sales appointments with Bankers sold members. And finally, we expect to replace the lost fee income in 2010 through a combination of new partner fee income and incremental Medicare supplement income.

Moving to annuity sales, slide 18 illustrates the shift in annuity sales between fixed and equity indexed over the last several quarters due in part to the volatility of the stock market. Since the first quarter of 2008, we have seen the percent of equity indexed annuities decrease from 60% to 27% of total annuity sales. Regarding the SEC proposal to regulate the sales of equity indexed annuities, at Bankers we do not expect total annuity sales to be significantly impacted if this is enacted. The majority of our branch sales offices maintain one or more registered reps that assists clients with portfolio management and broker securities.

Turning to slide 19, during the quarter, Bankers' surrender rates on both EIA and fixed annuity blocks were slightly lower than the fourth quarter of 2008. It is important to note nearly 90% of our total annuity block remains in the surrender charge period. Surrender activity was relatively stable and consistent with our expectations.

As mentioned in previous calls, in the third quarter of 2008 we 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 increase was submitted, of which we expect to receive approvals of $71 million, and as of March 31st we had received approvals from 30 states for $66.6 million or 94% of the total expected incremental premium. These approvals are projected to yield 94% of the $60 million ultimate expected annual financial impact.

In the claims area, we continue to focus our efforts on the implementation of best in class claims protocols and remain pleased with the progress being made on process changes that are improving cycle time and customer service levels. In the underwriting area, we continue to apply additional rigor to ensure prudent risk selection.

Finally on the long-term care product front, next month we will be introducing an updated version of our existing standalone long-term care product, with higher rates reflecting our current claims experience and profit margins. Additionally in June, we will be launching our annuity long-term care combo product, which will help diversify our risks inherent within our long-term care block of business. Lastly, here we see the impact of the earnings items previously discussed, producing an ROE on a trailing four quarters basis of 8.1%.

Now I will turn it back over to Ed to cover Colonial Penn and CIG results. Ed.

Thanks, Scott. Turning to slide 22, Colonial Penn's earnings in the first quarter of 2009 were $5.1 million, an improvement of 38% from the first quarter of 2008. The increase is largely driven by favorable life claims experience, lower expenses, higher investment income, and growth in business in force. Colonial Penn's life sales during the first quarter of 2009 were $12.3 million, a reduction of 4% from the life sales during the first quarter of 2008. This sales level is in line with our expectation and is consistent with the decision made earlier this year to reduce certain elements of our direct response lead generation activity in light of the company's ongoing capital management efforts. Turning to the next slide, we see that Colonial Penn's trailing four quarter return on equity is 13.4%.

Looking now at CIG, Q1 2009 earnings were up 34% versus Q1 2008, primarily impacted by several items -- an increase in earnings of approximately $5.5 million in the first quarter of 2009, primarily resulting from favorable development of year end specified disease and Medicare supplement claim reserves; an increase in year-over-year earnings of approximately $8 million due to a negative unlocking adjustment made in the first quarter of 2008; and a decrease in earnings of approximately $3 million due to increased surrenders of certain equity indexed annuities with market value adjustment features which have the effect of reducing related surrender charges in a low Treasury rate interest rate environment. Earnings were also somewhat negatively impacted by some of the remaining closed block LTC, which is now being reported in the CIG segment. As we noted before, this business is volatile from period to period. We also continue to have limited success in obtaining actuarially justified rate increases. We are continuing to analyze non-guaranteed elements of older life insurance policies issued by predecessor companies and make changes where appropriate.

Slide 25 illustrates the significant changes in CIG sales mix compared to the first quarter of 2008. Continuing a trend, sales rose by 20% 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.

There continues to be greater focus on our profitable business, with the contribution to profit from the new business higher than it was a year ago. CIG's focus on work site sales is showing strong progress, with work site sales up 27% over Q1 2008. CIG agent recruiting continues to be a good story, with record numbers of new agents in PMA, 52 new IMOs signed for CIG sales, and a 61% increase in producing worksite agents. CIG has been profitable now for five consecutive quarters, with consistent results for the last four quarters. Insurance policy income has turned the corner, with an increase in the first quarter over each quarter of 2008. CIG's annualized first quarter 2009 return on equity was 3.7%.

Now I will hand it over to Eric Johnson, our Chief Investment Officer, who will discuss the CNO investment portfolio. Eric.

Thank you, Ed. Good morning, everybody.

For the first quarter, net investment income was $308 million, representing an earned yield of 5.67% compared to 5.93% in the fourth quarter of last year. Yields on new money met and even exceeded our expectations, but we increased our average cash position substantially to approximately $0.75 billion, and that cash had a very low related return, which had an unfavorable impact on investment income. As the time has gone by, we continue to work to put that money to work to close that spread out, and that will be something we'll continue to work on through the second quarter.

Turning to slide 27, we realized roughly $85 million in gains on sales, which was offset by OTTI recognition of $108 million in the first quarter. You've heard that before. Those losses shaped up roughly as follows. About half came from a significant reduction in our Alt-A exposure and the other half came from a variety of sources. We reduced and eliminated in fact some corporate names that were becoming a little bit marginal. We sold some high yield -- corporate high yield names in order to continue to keep a close eye on that allocation. And there were a couple of things in the mortgage space as well. Our net unrealized loss increased marginally at [3.31] compared to year end, although since that point we did improvement in (inaudible) and spreads have narrowed during the last several (inaudible)

Let's go to slide 28 which breaks down our investment assets by rating. As you can see on slide 28, you will see our below investment grade allocation increased to roughly 9% largely because of ratings migration over the quarter. We have not been an active purchaser of low investment grade securities, but the rating agencies apparently didn't sleep very much during the quarter, and that had an impact on our below investment grade ratio.

If you want to go to slide 29, you will see during this quarter that we had 30 securities, representing almost $400 million in GAAP value which were downgraded from high grade to high yield, which had an impact on the RBC ratio of roughly 7 percentage points. And this is something we monitor very carefully -- as you can see the downgrades stretched across almost every sector of the credit market and more systematic impact in non-agencies in Alt-A, also in prime jumbo to some degree, and very little really in CMBS. Some work in corporate as well, although that was much more idiosyncratic. A couple of retailers, a couple of financials, and the harder to predict.

Let's go to slide 30. Slide 30 provides a very generalized overview of our asset allocation. For those of you who follow insurance companies, you will recognize that allocation is relatively common in the industry. We do have a somewhat higher allocation to corporate compared to some other companies and a somewhat lower allocation to alternative investments and commercial mortgages.

Going onto slide 31, slide 31 provides a mark-to-market summary by asset class, and that looks a lot like it looked at year end for those who remember the slide from that time. Obviously, while markets were a little easier now, mortgage related factors as well as financials continue to reflect a certain amount of uncertainty and stress. Many securitized products, particularly, remain relatively liquid and substantially inactive. One wonders if some of these will become orphans even that won't really print too much again after last year. As many companies have reported, it is very difficult sometimes to rely upon traditional pricing methods or automated pricing method to produce accurate values, particularly for more complex securities. Clearly it would generate substantial losses for us to liquidate our portfolio, but we have no intention of doing that or no need to do that. In fact, our greater challenge is to make sure we have our money at work as opposed to the opposite.

Let's go onto slide 32, which really addresses CMOs. And particularly our agency exposure has come down a little bit over the last couple of years and over the last quarter as we have worked to better match our assets and liabilities and extend asset duration. And as the government has had a bid for mortgage [for] agency product over the first quarter that had a natural draw on that asset class.

Let's go on to slide 33, which breaks down our private label securities, which are -- fall really in two categories, prime jumbos and Alt-As. And we've talked in prior quarters a lot about Alt-As, and I will have a few comments on that on the next slide, which is slide 34.

Slide 34 shows our exposure to Alt-A, which is about 1.38% of invested assets, which we actually reduced by about $100 million during the first quarter. And we'll continue to carefully work at this and monitor this portfolio to make sure it meets our needs on a long-term basis. Fortunately for us, we had been a fairly conservative investor in this area, and really at origination the securities we held were all triple A super senior securities and hence had significant credit support, which the current market is certainly drawing upon in terms of delinquency trends in ways that were unanticipated by us or probably anybody. And while our portfolio has better than market average qualitative characteristics and performance characteristics, it too had significant delinquencies. And this is an area we will continue to work on very hard. And obviously the rating agencies have been busy in this area. For those of who you follow the sector, you know that during the first quarter, probably two-thirds of this market was rerated or more, and rerated in many cases numerous ratings grades lower. And that's something which impacted our portfolio as well as the RBC ratio. However, we will continue to monitor this all very carefully and I would expect to continue to speak about it in future quarters.

Going on to slide 35, you remember about 15 months ago we used to talk a lot about subprime and now we really don't need to talk about it very much now because it is really only about $72 million, and probably not worth droning on about, so I won't.

If you want to look at slide 36, there are some of the delinquency and severity trends, which continue to be less than ideal or less than favorable. But notwithstanding those trends, we are on our $72 million -- we're fairly treading water in terms of mark-to-market and in terms of collateral cushion. We can live with that.

Going onto slide 37, slide 37 is about CMBS and it breaks down the vintage age of our exposure, which is about 3.1% of invested assets. Fortunately for us, our portfolio has fairly significant seasoning, very [below] 2006 and later exposure, and roughly 70% in the triple and double A categories. Our collateral, the underlying collateral is like very low delinquencies and significant credit support delinquencies, which are substantially lower than the overall market. Still, there is a lot of spread widening in this space, and it's generated a sizable and realized loss, especially in triple Bs. So this is something we're monitoring very carefully. The rise in delinquencies for the market as a whole will certainly affect this portfolio as they affect all portfolios, but we are very confident in the long run this portfolio will season out very well.

Slide 38 shows the underlying -- a quick snapshot of the underlying collateral behind the securities, and it is very diversified -- about 7,900 different loans spread out a lot by typing and geography, and as I said with very good performance characteristics. Just as a general comment, obviously spreads were better now than they were some months ago and recent trends of people having access to the market particularly through triple B, a couple large high yield deals. Obviously financials made a lot of noise last week, and we saw very quickly some names being able to raise large amounts of capital on very short notice. And so these trends are good, and they're having a positive impact. However, the environment is still has uncertainties and probably will continue to be a bit of a rocky road for the next little time ahead, notwithstanding which we think we're fairly well positioned to achieve the company's needs for the rest of the year.

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

Thanks, Eric. In summary, Q1 was a solid quarter, and I would like to again stress some of the key differences between Conseco and the rest of the industry, which become increasingly evident in this time of market and economic stress. First, our sales are continuing to grow. Second, our products are simple and straightforward, and we have less product risk in products that are designed for higher net worth customers. We'll be very focused on continuing to run the company more efficiently, improving our capital ratios, while continuing to grow Bankers and CIG new business. We've cut back on the growth rate in Colonial Penn because funding additional growth in that business is not a priority for the next year or so. It is also a business which we have proven we can grow at a high rate, but at a time when capital is key, slowing down this growth will allow us to have more flexibility.

The company overall has a strong franchise in the consumer senior middle market, with more than 4 million policy holders. It sells straightforward products to an underserved market, a market segment growing faster than the overall market. We don't have a lot of stock market exposure which others in the industry have, nor do we have any likely run on the bank risks that some of our highly rated competitors have. So we'll be continuing to work on sales growth at Bankers and CIG and continuing to make the business more efficient and continuing to work on projects to improve our capital position going forward.

And now we'll open it to questions. Operator?

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

Good morning. Thank you. Just a couple quick questions to clarify some things on slide 11 in the presentation if we could. First, I guess looks like statutory capital went down, and there was a GAAP earnings results in the quarter, but I wanted to clarify what exactly it was that had that stat number down. Were stat earnings positive or negative in the quarter?

Randy, this is Ed. Stat earnings excluding the investment losses were positive, but the investment losses overshadowed the earnings. Also the ratings downgrades that Eric also covered increased the amount of required capital as well. We did have the last of the phased in higher mortgage experience adjustment factor that also hit us in the quarter. So it is really those three things overshadowing the earnings as well as overshadowing the positives of terminating the private fee for service group cases. But I will remind you on the private fee for service group cases, that this is the first quarter of the beginning of the rolloff of required capital there. It is a trailing twelve-months premium that's used. So we will continue to get improvements in RBC as that trailing twelve months premium goes off over the course of not only this year -- it will carry into the first half of next year as well.

Okay. Great. That was so -- would it still run approximately the 6 points on the RBC?

Yes, yes. It will run at about that for this year, and then the first two quarters of next year will be approximately one-third of that amount in each of those two quarters.

Okay. Then on MEAF, is that now set at the new rate and can you remind us what that percentage is?

It is at 350% of the base factor, and it is the final phase in of that. There continues to be discussions at the National Association of Insurance Commissioners level that is a working group looking at it, but hard to say how if at all that will impact 2009. But in the meantime, we continue to look at various asset classes, including mortgages where there are high risk-based capital charges to see how we can reduce our exposures in those higher capital requirement classes of assets.

Okay. MEAF is effectively caught up for now?

Yes, it is. It can't go any higher other than if our exposure goes higher, but we're not investing in new mortgages.

One other quick one and I will get back in the queue. Back to slide 11, it says there was a reduction in cash flows to the holding company, and in the past you have guided or alluded to a $50 million to $125 million ability to upstream to the parent from the subs. Am I reading that as potentially affecting that, and in either case is that $50 million to $125 million number still a good way to look at that upstream?

That's still a good way to look at the upstream. On page 11, what that's meant to indicate that we could reduce the cash flows upstream by $80 million and be at the 1.5 times interest coverage. So it is margin calculation, not what's actually happening.

Understood. Thank you.

(Operator Instructions). Your next question comes from the line of John Wong of Trust Company of the West.

Hey, guys, thanks for taking my question. I guess in reference back to the amendment process in late March or early April, in terms of liquidity for year end, are you guys on track to meet that target or exceed it? Can you provide a little color on that?

John, we're on target to meet what we have got on page 12 there, which is updated to reflect the amended credit facility as well as our expectations as of the end of the quarter.

So that's really just down I guess by a couple million -- I think was around $75 million?

Right. It is primarily driven by the higher interest costs associated with the credit facility amendment.

Okay. All right. Thank you.

You're welcome.

(Operator Instructions). You have a follow-up question from the line of Randy Binner of FBR Capital Markets.

All right. I am back. So how about the gains? I apologize if I missed this in all the disclosure this morning, but you were able to harvest some gains in the investment portfolio. Where did those gains come from? And if I missed this in the disclosure, could you just remind us of how much is left in a gain position?

No, Randy. It is Eric. You didn't miss anything.

Okay.

I would get say -- I wouldn't use the term harvest gains. That implies that we ran around and pulled up all the flowers that we could with our heads up in the air. That wasn't really what happened. There were some natural transactions that I thought made some sense to do where we start to see bids and things and liquidity that didn't exist before, and in some cases at levels that were difficult to -- not logical in relation to the rest of the market. And so those circumstances we took the gain and in some cases reinvested the cash at a more favorable return. In some other cases, the cash is still pending reinvestment, and I mentioned the impact of that on net investment income. So I think -- where did they come from, I mean I mentioned that we did some transactions in the agencies, that agency CMOs that reduced our allocation there. We did some things in corporates as well. For example, there were energy and pipeline names where we already had pretty high exposures, and this was an opportunity maybe to kill two birds with one stone.

And I don't know that -- and maybe Ed or John could help me with this. I don't know what disclosure we make or made that's contemporaneous as to gross gains and gross losses in the portfolio. I think we have been reporting that net. So I don't know if I am probably in the best position to state right now the growth gains are X today and they were X at year end. I think there are more gains than there were at year end today, and I have a pretty good idea what this number is, but I don't know.

I can answer that part of it. Just to reiterate, Randy, that the gains realized in the quarter were approximately $85 million. We have got a comparable amount still available as of March 31, and as you know, the market since March 31 have been generally more favorable. So that number has grown somewhat since the end of the quarter, but we don't disclose that number.

Fair enough. I guess on that improving quarter to date, Eric, you touched on this quick -- but can you quantify how much you think the portfolio might have benefited in April? Or quarter to date, whatever?

Sure. Probably about $400 million.

$400 million?

Yes. That's an approximation, but it is close.

And that's obviously pre-tax and all other adjustments.

Yes, that's just a round -- add the assets up, put them in a pile, add them up the second date and put them in a pile and what's the difference between the piles.

On Alt-A, there was obviously a lot of rerating. Is that a process that's going to be a continuing process from the rating agencies, or do you think they have taken a break there?

They have pretty much [sliced] both sides of our [car], Randy, so there isn't a lot more they can do to us at that point in that particular area. But obviously they're now on to other things and corporates and REITs and things like that, and financials which I sometimes wonder about in the ratings. So I think they're off of that as far as we're concerned and onto other things.

All right. As long as -- I don't know how many other analysts are on, so one other question. With the deferred tax allowance and the investment losses -- I guess this question is more for Ed -- could that ever reverse, your ability to benefit from the taxes when you take a credit loss? Or is that -- ?

Certainly it is possible. Doing the allowance though is consistent with what we have done historically. And then given that the portfolio is still in a net realized loss position, that would be another key element that would have to change and sustain for some time to have the [fact] pattern be such that we could consider a change in the tax valuation allowance.

Okay. So it is not an issue of where we have a bunch of gains at the end of this quarter and wraps back? It has to be a few quarters of sustained pattern as you said?

Yes, for the accounting, but let me remind you that's the GAAP accounting. But from an actual tax paying basis, if we start realizing net gains, those will be able to use the existing NOLs.

Understood. And then I guess one for Jim. On the $60 million, high $60 million guidance for Bankers, is that inclusive of capturing all the rerates?

Yes, it is.

Okay. Perfect. Thanks, guys.

(Operator Instructions).

If there are no more questions, thank you, operator, and thanks to everyone on the call for your interest in Conseco. Conseco is focused on the senior middle market in America, the fastest growing major segment in the business. Conseco has a unique sales machine dedicated to this market, whether it is through agents, directors, or brokers, and we're committed to growing this business successfully into the future. Thank you all very much.

This concludes today's first quarter 2009 earnings conference call. You may now disconnect.