CNO Financial Group Inc (CNO) 2009 Q2 法說會逐字稿

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

Mr. Galovic, you may begin.

Thank you, operator. Good morning and thank you for joining us on Conseco's second quarter 2009 earnings conference call. Today's presentation will include remarks from Jim Prieur, Conseco's CEO and Ed Bonach, Chief Financial Officer, and Scott Perry, President of Bankers Life and Eric Johnson, our Chief Investment Officer. Following the presentation, we will have several other business leaders available for the Q&A period. During the conference call, we will be referring to information contained in yesterday's press release. You can obtain the release by visiting the company news section of our Web site at www.Conseco.com. We will also be referring to a presentation that can also be obtained and can be seen from the company's Web site. This presentation was filed in a form 8-K this morning. We will file our form 10-Q for the second quarter on or before August 10 and it will also be available through the investor section of our Web site.

Let me remind you that the forward-looking statements being made today are subject to a number of factors which may cause actual results to be materially different than those contemplated by the forward-looking statements. Please refer to yesterday's press release for additional information concerning the forward-looking statements and related factors. The presentation to which we'll be referring today does contain 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.

Now I would like to turn the call over to Conseco's CEO, Jim Prieur. Jim?

Thanks, Scott. We were very pleased that the second quarter results again showed bottom line net earnings. With operating earnings in all segments. Total EBIT exceeded $86 million in Q2. Up 47% over the second quarter of 2008. Net income of $27.6 million is also significant in these challenging financial markets.

Overall, new core business volumes in the second quarter of 2009 were down slightly from Q2 2008. An increase in core sales at Bankers of 6% was offset by a decrease in Colonial Penn sales of 27%, and a decrease in CIG sales of less than 1%. The decrease at Colonial Penn was consistent with expectations associated with the marketing cost reductions undertaken earlier this year, as part of our capital management initiatives.

Trailing four quarters collected premiums in the second quarter were up 8% over the second quarter last year. The company is also pleased to report record recruiting results at both Bankers and CIG, which we will speak to later in the presentation. Obviously, an increase in recruiting bodes well for future business volumes.

There were net realized investment losses in the second quarter of 2009, of $13.2 million. This included $36.6 million, of other than temporary impairment losses recognized in earnings. Total other than temporary impairment losses for the second quarter were $53.7 million, of which $36.6 million was recorded in earnings and $17.1 million was recorded in accumulated other comprehensive loss in accordance with new accounting guidance. Our accumulated other comprehensive loss improved by nearly $800 million during the second quarter, reflecting the increases in the estimated fair value of our actively managed fixed maturity investments.

Book value per share, excluding accumulated other comprehensive loss increased to $18.72 at June 30, 2009, from the year-end 2008 value of $18.41. Book value per common share increased to $13.06 at June 30, 2009, from $8.82 at December 31, 2008. Turning to slide six, collective premiums on a trailing four quarters basis declined, primarily due to termination of PFFS quota share contracts at Bankers and a slight decline in CIG due to the continued focus on the more profitable business.

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

Thanks, Jim.

Let's begin with second quarter 2009 results. As Jim mentioned, our total core segment earnings continued to improve. As you can see on slide seven, our net operating income of $40.8 million equated to $0.22 per share for the second quarter, compared to net operating income of $25.2 million, in the second quarter of 2008, or $0.13 per share. For the second quarter, net income of collectible common stock was $27.6 million, which includes $13.2 million of unrealized investment losses compared to a net loss of $488.5 million in the second quarter of 2008, which included $513.7 million of net realized investment losses, valuation allowance for deferred taxes, and losses related to discontinued operations. This equates to net income of $0.15 per share for the second quarter, including $0.07 per share of net realized investment losses, compared to a net loss of $2.65 a year ago, which included $2.78 of net realized investment losses, valuation allowance for deferred tax assets and losses related to discontinued operations.

Turning to slide eight, the company again has operating income in the three insurance segments. Year-over-year, total segment EBIT increased to $86.7 million, in Q2 of 2009, compared to $59 million a year earlier. In our Bankers Life segment, pre-tax operating earnings were $63.3 million in the second quarter, compared to $34.6 million in the second quarter of 2008. Results for the second quarter were primarily affected by an increase in earnings of approximately $18 million, in long-term care, resulting from the claims management improvements and rate increases implemented over the last year.

An increase in earnings of approximately $7 million in Medicare supplements, resulting from decreased morbidity and improved persistency. And an increase in earnings of approximately $7 million related to the company-owned life insurance policies, which were purchased to fund the segment's deferred compensation plan for certain agents. Such variance resulted from a $3 million death benefit recognized as income in the second quarter of 2009, and an increase in the investment values underlying such policies in the second quarter of 2009.

In our Colonial Penn segment, the pre-tax operating earnings were $11 million in the second quarter, up 33%, compared to $8.3 million in the second quarter of 2008. Results for the second quarter were primarily affected by the recognition of the $3 million final distribution, following the termination of a group insurance pool that Colonial Penn previously participated in. In our Conseco Insurance Group or CIG segments, pre-tax operating earnings were $21.2 million in the second quarter, down 34% compared to $32.3 million in the second quarter of 2008.

Results for the second quarter were primarily affected by a reduction in earnings of approximately $10 million, from the annuity block primarily due to additional amortization expenses resulting from increased surrenders, certain fixed index products, with market value adjustment features, which have the effect of reducing related surrender charges; and increases in our estimates of future surrenders of these products. It is also a reduction in earnings of approximately $4 million from the long-term care products, primarily resulting from an increase in claims, a reduction in earnings of approximately $2 million from specified disease products, primarily resulting from higher incurred claims and expenses, partially offset by an increase in earnings of approximately $10 million from life products due to improved mortality experience, and favorable persistency.

The corporate operations segment includes our investment advisories subsidiary and corporate expenses. The second quarter of 2008 included a $9.6 million charge related to the consolidation of our Chicago facility. Corporate interest expense reflects the higher interest rate paid on debt following the amendment to our credit facility 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 point spread above LIBOR on the senior credit facility.

Net realized investment losses in the second quarter of $13.2 million included $36.6 million of other than temporary impairment losses recognized in earnings. Such net realized investment losses included deferred tax valuation allowance of $4.6 million, as it is more likely than not that tax benefits related to investment losses recognized in the second quarter will not be utilized to offset future taxable income. Net realized investment losses in the second quarter of 2008 of $17.4 million, included $26 million of write-downs 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 have previously reported, our former senior health business is reported as a discontinued operation in financial statements presented after November 12, 2008. As a result, all senior health business previously included in our other business and runoff segments is now reported as discontinued operations. Non-Senior Health LTC business, as well as the 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.

Slide nine shows our trailing four quarters operating return on equity, excluding increases to the deferred tax assets valuation allowance and losses related to the Senior Health transfer. ROE on this basis increased to 6.9% for the four quarters ended June 30, 2009. The increase is primarily due to increased operating earnings and a lower equity base, due to investment losses sustained over the last four quarters.

Turning now to slide 10, net operating income for the second quarter was $40.8 million, or $0.22 per share. This compares to net operating income in the second quarter of 2008 of $25.2 million, or $0.13 per share. The Q2 2009 operating income excludes $13.2 million of net realized investment losses, including these net realized investment losses results to net income applicable to common stock per share of $0.15 as compared to $2.65 in loss per share for the second quarter of 2008. I would again remind you that when looking at quarterly earnings for Conseco, it is important to keep in mind the seasonality of our business, with operating earnings weighted to the second half of the year.

Slide 11 details out the primary financial covenants which reflect the changes as a result of the credit facility amendment in March. As a quick reminder, the amendment provides for relief on the financial covenants for the period of March 31, 2009, through June 30, 2010. The covenants revert back in Q3 of next year, to the levels applicable prior to the amendment which you can see in the Q4 2008 call. Our debt to total capital ratio calculated, excluding accumulated other comprehensive loss, improved to 27% at June 30, 2009, compared to 27.9% at the end of March, and 28.3% at December 31, 2008.

Risk-based capital at our insurance companies improved in the second quarter to 247%. I will touch on the changes in RMBC in the quarter in a moment. Please note that this surplus level is nearly twice the company action trigger level of 125%, and is significantly above the current covenant minimum of 200%. In the far right column, we have also detailed out our margins for adverse development from 2009 levels on each of those covenants.

There continue to be many questions regarding our plans to deal with the convertible debentures which have a put right at par in September, 2010. The options which are available to us under the current credit agreement are to exchange the convertibles for another convertible, debt, and/or equity individually or in some combination. We continue to evaluate and pursue strategic moves to bolster our capital position going forward, which I will cover in more detail shortly.

Our overall liquidity decreased during the second quarter with approximately $79 million of cash at the holding company as of June 30, 2009. This was primarily due to the repayment in April of the remaining $55 million outstanding on the revolver. The revolver matured on June 22.

Our current liquidity projection which reflects the additional debt servicing costs following the amendment to our credit facility shows a projected December 31, 2009, cash balance at the holding company of approximately $67 million. Our liquidity at the holding company has been impacted primarily by the strength of our insurance subsidiaries. Our insurance companies currently are expected to generate approximately $200 million of statutory operating profits annually, excluding extraordinary items. This is in excess of the capital needs to support ongoing growth. 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 our core earnings power.

In addition to dividends from the insurance company, the holding company also generates cash from interest payments on surplus notes and fees for investment and administrative services provided to the insurance company. As indicated earlier, our consolidated RBC ratio increased in the second quarter by 17 points. A change from Q1 was impacted by several different factors. Positively impacting the ratio during the quarter were the NAIC relief on the mortgage experience adjustment factor, and the strong second quarter statutory operating results. Partially 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 downgrades and causes to record certain impairments, along with dividends of $10 million, and interest paid to the holding company on surplus debentures.

Slide 14 is a water fall chart showing the the major impacts to RBC for the period June 30, 2008, through June 30, 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 and rating down grades have resulted in a 97 percentage point reduction in our RBC ratio over the last year. The impact of the mortgage experience adjustment factor has been significantly reduced due to NAIC relief provided on the maximum factor, moving it from 350% down to 125%. Unfortunately, these negative factors overshadowed the positive impacts of several management's actions, and the operating income of our insurance subsidiaries. Capital and risk management are critical in the life insurance sector, especially in the current economic environment. This continues to be our top focus.

As part of our capital and risk management efforts, we have been working on several initiatives. In July, we announced an agreement under which two of our insurance companies in the Conseco Insurance Group will co-insure with an effective date of January 1, 2009, about 104,000 non-core life insurance policies with Wilton Reassurance Company. We will receive a seeding commission of approximately $57.5 million, and Wilton Re will coinsure 100% of the policies along with assuming the administration of these policies. We expect that this transaction on a pro forma basis will increase our consolidated risk-based capital ratio by eight percentage points, along with increases in statutory capital, in addition to further simplifying our administrative operations.

The transaction which is pending regulatory approval is expected to be completed in the third quarter of 2009. As a result of the transaction, we expect to record an increase in our deferred tax valuation allowance of approximately $20 million in the third quarter of 2009. We also expect to record a deferred gain of approximately $25 million, which would be recognized over the remaining life of the block in accordance with GAAP. In the first six months of 2009, the block being coinsured, generated GAAP after-tax earnings before overhead of approximately $5 million.

One of the other important actions relates to reinsuring an increased portion of the Bankers LTC new business. In late 2008, we entered into a co-insurance agreement with reinsurance group of America, or RGA, to reinsure 2008 and future new business. RGA reinsures 70% of Bankers 2008 LTC production, and had initially agreed to reinsure 50% of new LTC business for 2009 and beyond. The 2009 seeding percentage has now been increased to 70% under this agreement, providing more capital relief. With respect to our investment portfolio, we continue to manage it so as to mitigate where possible the RBC impact of ratings migration.

There are two capital management items to note with respect to our relationship with Coventry. In late 2008, we agreed with Coventry to discontinue our reinsurance participation in two group PFFS cases, which is not our core business. One group's reinsurance ended on December 31, 2008, and the other one terminated on June 30, 2009. In addition to the sales of proprietary products, Bankers Life distributes Coventry's Medicare, PDP, and PFFS plans through Bankers career agents, Coventry has decided to exit the PFFS market effective January 1, 2010.

As a result, our participation in the associated quota share reinsurance contracts will end on December 31, 2009. On July 22, 2009, we announced a strategic alliance under which Humana's Medicare Advantage or PFFS plans will be offered to Bankers policyholders and consumers nationwide through our career agency force and we will receive marketing fees based on sales. The company will not participate in any reinsurance related to this new agreement. Both of these changes with Coventry and Humana will improve RBC over the next year.

With respect to operations, we have done a couple of things from a capital management perspective. We have limited Bankers branch expansions and made the decision to reduce certain elements of our direct response lead generation activity at Colonial Penn. We do not expect either of these actions to have a significant impact on earnings for 2009.

Slide 16 details our capital structure. The company's credit facility consists of an $855 million term loan. The revolver balanced which matured in June, 2009, is paid off in April of this year. The term loan matures in 2013. We have $125 million note due to Senior Health which is payable over five years in equal installments with the first installment due in November of this year. We also have $293 million of outstanding senior unsecured convertible debentures that are puttable at par on September 30, 2010.

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 $63.3 million, which was higher than the prior year of $34.6 million, an 83% improvement. The main drivers positively affecting earnings were higher long-term care margins due to rate increased activity which began in the fourth quarter of 2008, and improved claims handling results. Higher Med Supp. margins due to lower benefit ratio, and improved persistency; and higher investment returns on our COLI program and a death benefit recognized in the second quarter. Our core sales for the quarter were $63.1 million, which was up 6% over the same period last year. Bankers also had continued success in the recruitment of agents with new agent contracts up 23% on a year to date basis.

The next page has more details on our sales results. The second quarter was highlighted by continued strong sales of annuities, up 14% over the prior year, and Med. Supp. sales up 13% over the prior year. Life sales were flat and LTC sales were down 8%. This decline in long-term care sales was consistent with the overall industry declines.

During the second quarter, our private Fee-for-Service sales are showing gains due to the charge-back situation we had in the second quarter of 2008. On a year to date basis, private Fee-for-Service sales are down 24% from last year, mainly due to the new CMS marketing restrictions which have impacted gross submissions and a refocus of our agency force on the Medicare supplement market.

Moving on to our 2009 sales and distribution results, as I mentioned earlier, we have continued to have success recruiting in both volume and quality of candidates. And now have an average agent count of 5,183, as of the end of the second quarter. This represents an 11% increase from 2008. It has been previously announced, our partner for private Fee-for-Service, Coventry, has decided to not participate in the Private Fee-for-Service market for the 2010 plan year. However, this decision will not disrupt our distribution of Medicare Advantage plans, as we recently announced a strategic alliance with Humana to begin selling their Medicare Advantage plans nationwide.

I will discuss this relationship in more detail on the next slide. But first, it is important to note that regarding our existing private Fee-for-Service membership enrolled with Coventry, it is the banker's agent who has the relationship with the private Fee-for-Service member. In establishing a national partnership with Humana, Bankers agents will be able to continue to provide these individuals with access to multiple Medicare solutions, whether that is a Medicare Advantage plan or one of our own Medicare supplement plans. Finally, be mindful that this change does not affect our arrangement to distribute and reinsure the Coventry stand alone PDP plan, a business we expect to continue to grow and reinsure.

Regarding our announcement to partner with Humana to sell their Medicare Advantage products, let me make a few points. First, we expect to begin selling 2009 plans in late Q3 for 2009 effective dates and 2010 open enrollment. Humana's current network coverage provides access to 95% of the Coventry Bankers sold in force, which positions us well as the market transitions from private Fee-for-Service to Medicare Advantage network-based plans. We expect to replace the lost income in 2010, through a combination of new fee income and incremental Medicare supplement income. And finally, this new partnership will be a fee only arrangement which will result in slightly lower earnings but importantly reduces both earnings volatility and statutory capital requirements. Specifically, providing a pickup of five points in consolidated RBC ratio.

Slide 21 illustrates the continued shift in annuity sales between fixed and fixed indexed annuities over the last several quarters, due in part to the volatility in the stock market and since the first quarter of 2008, we have seen the percentage of indexed annuities decrease from 60% to 38%, of total annuity sales. Regarding the SEC proposal to regulate the sales of fixed indexed annuities, at Bankers we do not expect total annuity sales to be significantly impacted if this is enacted. The majority of Bankers branch sales offices maintain one or more registered reps that assist clients with portfolio management and broker securities.

Turning to slide 22, during the quarter, Bankers did see a slight uptick in fixed equity indexed annuity surrenders with a rate of 12.4%. The average over the past two years has been 10.2%. We believe the main driver for this increase is a consumer movement to fix products that we continue to see during the early part of this quarter. But we did see this abate later in the quarter, as equity markets rebounded. Surrenders on fixed annuities overall have been stable. It is important to note that 89% of our total annuity block remains in the surrender charge period.

Turning to slide 23, you can see an update to the progress being made on the long-term care re-rate activity that is currently under way. As a reminder, this re-rate impacts about half of the Bankers long-term care business. As of the end of the second quarter, we have achieved 100% of our targeted goal of $70.9 million, with an expected financial impact of $53.2 million. We expect to exceed this goal during the remainder of this year. In the claims area, we continue to focus our efforts on the implementation of best in class claims protocols and we 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 assure prudent risk selection.

Finally on the long term care product front, in June, we successfully launched an annuity long term care combo product which will help diversify our risks inherent in the long term care block of business. Sales were strong in June, exceeding our initial expectations with this product. Also, in the third quarter of 2009, we will be introducing an updated version of our existing stand-alone long-term care health product, with higher rates reflecting our current claims experience, and profit targets.

Lastly, on slide 24, we see the impact of the earnings items previously discussed, producing an ROE on a trailing four quarters basis of 8.7%. Now, I will turn it back over to Ed to cover Colonial Penn and CIG results. Ed?

Thanks, Scott.

Turning to slide 25, Colonial Penn's earnings in the second quarter were $11 million, a 33% improvement from the second quarter of 2008. This increase is primarily as a result of the recognition of the $3 million settlement arising from the termination of a group reinsurance pool which Colonial Penn previously participated. With regard to Colonial Penn's recurring operations, life sales for the second quarter were $10.6 million, which is down 27% from Q2, 2008. This is generally consistent with expectations associated with marketing cost reductions undertaken earlier this year as part of our capital management initiative.

During the first half of 2009, we reduced our marketing costs associated with lead-based advertising and related fulfillment costs by approximately $9 million. This 38% reduction in expenses has a direct and positive near-term impact on the unit statutory capital and surplus. Although sales volume is down, general sales productivity remains strong, with our leads per spot aired stable. Our cost per lead obtained improving 9%, and our initial purchase rate improving 17%, when compared to the first half of 2008. We also put in a price increase in the second quarter that improves revenues per sale. Turning to the next slide, we see that Colonial Penn's trailing four quarter return on equity is 14.1%.

Looking at CIG results on slide 27, second quarter earnings were down 34% versus Q2 2008, primarily impacted by the following: A reduction in annuity earnings of approximately $10 million, including an unlocking adjustment due to excess terminations on a block of fixed indexed annuities, and lower margins for the health lines of approximately $6 billion, primarily due to higher claims.

These are partially offset by an increase in earnings, of approximately $7 million from life products primarily due to improved mortality experience and favorable persistency. I will comment on the favorable sales results in the next slide.

Slide 28 illustrates the desired shift in CIG sales mix, with specified disease sales up 18% over Q2 '08. Work site sales are up 13% year to date, which demonstrates increased traction in this important market. Sales momentum is being supported by strong recruiting results in both sales channels, with 126 new recruits for the quarter at our wholly-owned distributor PMA. CIG sales, our independent channels contracted 502 new agents, most of which specialize in the work site market. The decrease in annuity sales from Q2 2008 is consistent with the greater focus on product lines with a greater contribution to profit.

Turning to slide 29, fixed indexed annuity surrenders were slightly down from the first quarter, but up significantly over 2008, due to a market value adjustment feature included in one block of annuities. Surrenders on non-indexed annuities have been stable. 65% of CIG's total annuity block remains in the surrender charge period. CIG has now been profitable for six consecutive quarters and showed an annualized second quarter 2009 return on equity of 2.2%.

And now, I will turn it over to Eric Johnson, our Chief Investment Officer, who will discuss the CNO investment portfolio. Eric?

Thanks, Ed. And good morning, everybody.

For the second quarter, net investment income was $308 million, which represented an earned yield of 5.65% compared to 5.67% in the preceding quarter. While yields on new investments basically met our expectations our average cash and short term investment remained relatively high for the second quarter and the low returns on that block of money had an unfavorable impact on overall investment income, which was somewhat lighter than we would have liked.

Referring to slide 31, slide 31 is about gains and losses in the quarter, and as you've already heard that we realized $20.3 million in net gains offset by other than temporary impairment losses of $36.6 million.

Going on to slide 32, you can see that during the second quarter, we had over $416 million downgraded from investment grade to below investment grade, and this impacted the company's RBC ratio by 9 points. The greatest effect came from prime jumbos and corporate stock rated during the quarter. Looking ahead, we would expect that CMBS ratings may be under some pressure in the coming quarter or two.

Let's go on to slide 33, which breaks down our second quarter impairment losses by asset type. CIT cost us approximately $14 million in the quarter. And commercial mortgages cost us approximately $15 million during the quarter. We know there has been some interest in CIT, remaining exposure is approximately $9 million.

Let's go on to slide 34, which breaks down our investment assets by rating. As you can see, our below investment allocation remained at approximately 9%. As the negative impact of the credit cycle and the ratings migration that are prevalent out there was offset by us by the sales of certain below investment grade securities. It is likely this environment will continue and we will have to keep a careful eye on that ratio.

Going on to slide 35, which illustrates mark-to-market trends by asset class, and we benefited during the quarter from spread tightening, in a broad range of areas. However, some segments, CMBS, ABS, financials, and a couple of others, continue to reflect certain fundamentals, and liquidity, and still continue to have mark-to-market issues. Going on to slide 36, which is about all day, and as that slide shows, we have about 1% of our money in all-day securities. Now, that allocation has been reduced by approximately 35%, 36% during the first six months of the year.

However, it is an area we will continue to carefully monitor. In general, our holdings in this area are doing a little bit better in the market as a whole, in terms of delinquencies and CUM losses, and qualitatively, it is a fairly well called portfolio with good credit support, but it still reflects significant delinquencies relative to original expectations, and has a substantial mark-to-market deficit. And we expect to recover our carrying value but we're going to have to watch very carefully.

Going on to slide 37, which is about sub-prime, which is at this point only 20 basis points of invested assets, during the first half of the year, and through the second quarter, delinquency and severity trends both continued to be unfavorable, but not notwithstanding which we are satisfied with the credit support and the performance in our collateral.

Going on to slide 38, which is about CMBS, this fortunately for us, this is a portfolio with significant seasoning, and it is very highly rated today. The great bulk of it being in the double and AAA categories.

However, I think everybody who is involved in that area would anticipate some impact from the ongoing re-rating process, at S&P and wherever else that happens. So we will have to stay tuned there. There are obviously also rising delinquencies in that area, for the market as a whole, and they're affecting our portfolio to a lesser degree than the market as a whole, but still to a degree, but we do think this portfolio will season out well and give us the cash flow and the earnings that we originally expected.

Now, let's go on to the next slide, and this really focuses on the low delinquencies and the credit support in that portfolio, notwithstanding which particularly as you go down the rating scale, into BBB's and even single A's, you continue to have severe spread widening. Things are better but not where they started, and there is a pretty sizable realized loss at the bottom end of the rating scale in that space.

Let's go on to slide 40, which is just a picture of the underlying collateral behind our CMBS securities and what that tells you is it is pretty diversified.

Slide 41 provides some very high level summary statistics on our commercial mortgage loan portfolio which is approximately $2 billion and about 10% of invested assets. It is a very diverse portfolio, with over 400 loans, actually over 450 loans, with a very small number of large loans, and no loan that is more than about 30 basis points of invested assets, not even that much, 20 actually, and very low delinquencies. Historically, however market defends as they are, this is a segment that will be under pressure for some time ahead and it is going to produce increased delinquencies and probably impairments.

As a general comment, certain recent trends suggest the credit crisis is thawing a little bit in terms of access to liquidity for certain corporate high quality issuers but there is a clear trend toward deleveraging for consumers and for companies and that is going to continue. It will be helpful to the credit markets in the long term, but difficult in the near term. The direction of the overall economy is somewhat unclear and the impact of monetary policies have to fully play through. This is an environment that is unsettled, and it is likely to lead to a near-term level of impairments which is higher than very low recent historical norms. Notwithstanding which we think we're in good shape to deliver what the company needs to deliver through the rest of the year.

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

Thanks, Eric. We continue to generate solid operating earnings.

This is the second quarter in a row with positive net income. As we mentioned before, there is quite a bit of seasonality in Conseco's earnings. Some of this has not been that visible in the past when earnings were overshadowed by reserved strengthening and remediation charges. The net advantage and PDP had quite a bit of seasonality to their earnings and in addition, there tends to be higher mortality on life products, in the first quarter of each year, and particularly in our target market segment. Historically, we have shown stronger earnings in the second half of the year. Our core sales continue to improve, in contrast with many others in this declining market.

Capital management is our top priority. The convertible debenture put in September 2010 is a key issue with respect to moving forward on this initiative. In addition, we will continue to re-evaluate reinsurance opportunities as they arise and make sense and we will continue to manage the investment portfolio in an effort to mitigate negative RBC impact from credit migration.

Finally, we are very focused on continuing to run the company more efficiently, while continuing to grow Bankers and CIG new business. We have cut back on the growth rate at Colonial Penn. Because funding additional growth in that business is not a priority for the next year or so. It is also a business where we have proven that we can grow it at a high rate, but in a time when capital is key, slowing down its growth will allow us to have more capital flexibility.

And now we'll open it up for questions. Operator?

(Operator Instructions). We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Randy Binner.

Hi, good morning. Thank you. I guess the obvious first question is to try and get a little more color on options for the convertible a little more color on options for the convertible put, Jim you had mentioned, or Ed had mentioned that there was potential for debt, potential for a new convert, and potential for an equity exchange, or a combination there of. Just would be interested in more color on if any one of those is kind of more of a leading contender, and also, if you can share how we should think about potential dilution from any one of those three scenarios. Dilution to equity holders, that is.

Sure. Well, as outlined by Ed earlier in this call, we can do exchanges for the current convertibles, exchanges of debt, or equity, and as more fully described in our 10-K, and our 10-Q, earlier 10-Q and one coming out, there is a maximum amount of debt that can be issued. There is also a maximum amount of interest that can be paid on debentures. And then with respect to equity, clearly we're very mindful of the fact that there are limitations with section 382 of the Income Tax Act, as to how many shares can be issued. So those are the elements that we're looking at.

If you could help us, what would be the debt and interest maximums? Currently?

Essentially, we can replace the $293 million of debentures, with $293 million of new debentures, and the coupon could be twice as high as the current coupon, which is 3.5%.

Okay. And so if that was the case, and we looked at a slide on page 12, I mean Ed, if you did that, I guess, it would be in the neighborhood of $10 million more. If that's right, can you carry that through that cash balance and still stay comfortable? From a liquidity perspective?

Yes, we believe we can.

Okay. And then if there was the option and option where you extended out the convert but lowered the conversion feature, the conversion price, would that potentially also have dilution for equity holders?

It wouldn't have immediate dilution, but upon exercising the conversion, then it would result in dilution.

Okay. So is that where -- or put another way, if the stock traded above that strike price, then the dilution would go into shares, is that another way to think of it?

Sure, it would be the standard calculation you do for every company, Randy.

Right. Fair enough. I guess I will just go one more and get back in the queue. On slide 11, it looks like, because of MEAF and ratings drift, the new minimum excess capital figure is on statutory capital, so that is around $179 million, I mean maybe you could just share with us the plan -- I mean assuming that you're targeting, getting back to the pre-existing debt covenants, by June of 2010, kind of how you plan to manage that buffer back up to an acceptable level? I mean I guess it is a combination of reinsurance and earnings and everything weaved talked about but just a -- we've talked about but just kind a little more of the outlook for that metric in particular would be helpful. Thanks.

I think it is important to remember that we haven't included the Wilton Re transaction that we have described in the past. So that is not in the numbers at this point. Neither the net of the cash nor the reduction in the required capital. And the other thing to recognize is that the statutory income of the insurance companies at Conseco is substantially higher now and going forward, because of the spinoff of senior health insurance. So that combination all moves us in a positive direction.

All right. Thank you. I will get back in the queue.

Thanks, Randy.

(Operator Instructions). Your next question comes from the line of Paul Sarran.

Good morning.

Good morning, Paul.

You mentioned the limit related to the section 382, on new shares. Do you know what that is?

Yes, we do. We have not publicly disclosed the exact amount, but also want to remind you of -- that is an important asset and why we put the section 382 shareholder rights plan in place, so that we can manage the amount of 5% holders which count towards 382, and keep that asset something that we can hopefully realize and utilize.

How would lowering the convert price, if you exchanged for new converts, how would that affect section 382? Would it only be -- would it only count towards it when those actually converted?

Yes.

Okay. And then just changing direction a little bit, can you talk about how you're able to be competitive in CIG, specifically with the specified disease product, given the differential in ratings between Conseco and some of your competitors?

Yes in the markets that we're in, ratings have not been that -- as important as they've been in other markets. And, you know, obviously if we're increasing our sales in specified disease at a rate of 18%, then you know the proof is in that pudding.

I think the other thing is that a big portion of our sales there are face-to-face, one-on-one sales, where primarily PMA agents are driving to meet people in rural America, one-on-one, and many of these people do not have anyone calling on them. So from that standpoint, again, it is an underserved market that we're focused on.

Are the PMA associates selling other company's specified disease products or similar?

No, just ours.

No.

Okay. And how would you describe the pricing on that? Are you essentially getting the prices that you want?

Yes, it is among our highest margin products.

Okay. Then a couple other quick ones. Do you have a number for the unrealized gains on the portfolio at the end of the quarter?

This is Eric Johnson. I presume you mean net unrealized gain loss by your question, because I don't think we report it in part. Everyone is looking through their draft 10-Q for the number. And what I will do is tell you that I think it will be about $1.9 billion.

And that's the net number? You don't split out what is --

That is the net number.

So do you split out what is gross unrealized gains versus gross unrealized losses?

As I sit here, I don't recall that the Q will provide that, but if it will, we certainly got it. Well, John Kline, the Chief Accounting Officer, just showed us the draft page. I was right about the 1.9. Included in that number is approximately $160 million of unrealized gains.

Okay. That's helpful. And then just one more quick one, did you -- do you have an estimate of the impact on earnings RBC for increase in the RGA reinsurance from 50 to 70% that is going to have a meaningful effect?

It won't have a meaningful effect for the 20% increase. One, it depends on how much we do have in sales, of course, but assuming the same sales level in the second half, as we've had in the first half on Bankers LTC, it will improve Bankers RBC by about half a point. But it is at the same time saving hundreds of thousands of dollars in statutory strain or capital as well.

So was that the primary -- well, how could it save -- I mean the benefit to RBC is essentially the savings on stat capital, right?

Yes, but my point is, Paul, that it improves the absolute capital because we don't have -- we only now have 30% of the strain we need to digest and RGA has 70% of the strain, when you sell a new product. So from a --

So that improves on the absolute statutory capital minimum, that metric?

Yes. And at the same time, we only have 30% of the risk, so both the numerator and denominator of risk-based capital benefit from this reinsurance.

Okay. Thanks. That's helpful. That's all I had.

(Operator Instructions). Your next question comes from the line of [Jill Baker]. Ms. Baker, your line is open.

Yes, hi, I just want to be clear, on the convertible exchange, are you not able to pay any kind of cash in exchange for that convert?

That's right.

Okay. So you would basically be trying to issue another convert to replace the convert that is outstanding?

Either debt or equity, that's right.

I see. But your coupon would be limited to 7%?

On any piece of debt, that's right.

Okay. Great. Thanks so much.

We have a follow-up question from the line of Randy Binner.

Great, thanks. You know, just back to CIG real quick, I know that this was a small item in the quarter but it has been a little bit recurring and I just want to get a little more color and just on spec disease, it just seems like there is a little slippage on the benefit ratio. Is there an issue, is there anything in particular that we should think about in that product line?

No, Randy, I would say the primary thing is with the spec disease, just like other lines in the health and life, you can get quarter to quarter fluctuations, and we did have somewhat of an increase in overall claims. Now that said, there is one part of the benefit of some policies that is related to chemotherapy drugs and the price of those drugs have gone up dramatically. We've also seen an increase in claims of one sort on the hospital side that we are addressing in claims management, as well as in -- with one of the riders putting in a price increase.

Okay. That's very helpful. And I guess, going back to the 382 issue, the NOL, I mean with the shareholder rights plan, and everything you've articulated, clearly it is a priority to defend that NOL, but I mean is there any point where that would be on the table, whether it would make sense to let that go to the benefit of other issues?

Well, I mean theoretically, but practically, no. I mean it is very important for us, the deferred tax asset is included in the calculation of our capital ratio, debt to capital ratio, and so I mean removal of that deferred tax asset would have a dramatic impact on that ratio. And we would be in trouble virtually instantaneously.

Relative to our debt covenants. And then the other thing is that it is an estimated present value of over $2 a share.

From an economic --

Yes, okay. That is helpful.

Whenever you talk about the tax asset, at Conseco, there are sort of two things. There is the accounting thing, the accounting number, and we set up allowances, and we don't set up allowances, they're conservative or they're liberal, but the underlying deferred tax asset, the economics of it, is very important to maintain, because as Ed pointed out it is worth a very significant amount of money on a per share basis, just looking at the present value of that shelter that we get.

Great. And I'm going to ask one more, just because I got back in line so quick. And Ed, I think it might be helpful for me, but other folks listening to the call, it seems like there is a lot of potential benefits or good guys to RBC coming up that aren't necessarily in the 247 that we're looking at right now. And so I mean I have RGA, Wilton RE, decreased gross, and then the Coventry PFFS. If we could just run down real quick, kind of what the potential benefits are pro forma there, it would be nice just to kind of have that all in one column.

Good feedback. I will try to cover that verbally here right now, for the benefit of everyone. As Scott Perry did touch on it with the Coventry side, is approximately 5 points of RBC benefits that we would expect, from the changes there, both on the individual as well as the group PFFS side. With the RGA long-term care reinsurance, when we originally went into the agreement, in 2008, at 70% for 2008, and 50% going forward, we said that was approximately 2 to 4 points of RBC, again it depends on our sales volume, so it still would be in that range, Wilton Re is 8 points of favorable RBC, on a pro forma basis.

As far as the reduction in spending in particular, at Colonial Penn, on a consolidated basis, it is worth about a point of RBC, if they were at a $10 million to $15 million reduction in spending, which is sort of our run rate. We have reduced about $10 million, and we would expect to hold the line at a lower level for the second half of the year. So I think I hit on everything. Did I miss anything, Randy?

No, that's excellent. So I mean there is something like 16 to 18% of good guys, kind of through capital management that we could match against expectations of earnings and credit, essentially?

That's right. But to be fair, and you hit on it, we still do expect staff to continue to fight the head winds of credit migration, ratings migration, and it has slowed somewhat, but it hasn't stopped.

Understood. One other question, and I promise I will get off. On MEAF, any commentary on how sustainable you think that adjustment you have gotten there is?

We believe that the working group is very serious about putting in permanent longer-term relief. We're aware of two proposals that they're really looking at. One of them is a lot more straightforward and simple to implement. The other is maybe theoretically more accurate but I think it would be a bear for the industry to implement. I think we will get another update or we should, the industry should, with the fall NIAC meeting which is about six weeks away.

Excellent. Thank you.

There are no further questions. Are there any closing remarks?

Yes, thank you, operator. Well, we're going to continue to work on our business plans, thank you, everyone for your interest in Conseco. We continue to be focused on the senior middle market in America. It is the fastest growing major segment in the insurance business. We have a unique sales machine dedicated to this market, whether it is through agents, director, or through brokers, and we are committed to growing this business profitably and successfully in the future. Thank you.

Thank you for your participation. This concludes today's second quarter 2009 earnings call. You may now disconnect.