CNO Financial Group Inc (CNO) 2009 Q3 法說會逐字稿

Good morning. My name is Bonita and I will be your conference operator for today. At this time, I would like to welcome everyone to the third quarter 2009 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions). Thank you.

I would now like to turn the call over to Scott Galovic. Sir, you may begin.

Thank you, operator. Good morning and thank you for joining us on Conseco's third quarter 2009 earnings conference call. Today's presentation will include remarks from Jim Prieur, Conseco's CEO, Ed Bonach, Chief Financial Officer, Scott Perry, President of Baker's Life and Eric Johnson, our Chief Investment Officer.

Following the presentation, we will also have several other business leaders available for the question-and-answer period. During 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 website at www.Conseco.com. We will also be referring to a presentation that can be obtained and viewed from the Company's website.

This presentation was filed in Form 8-K this morning. We will file our Form 10-Q for the third quarter 2009 on or before November 9, 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 yesterday's press release for additional information concerning these statements and the related factors.

Finally, the presentation to which we will be referring 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 will turn the call over to Conseco's CEO, Jim Prieur. Jim?

Thanks, Scott. We were very pleased at the third quarter 2009 results, again showed bottom line net income with operating earnings in all of our segments. Third quarter net income of $15.4 million represents our third consecutive quarter of net income.

Overall, core new business volumes in the third quarter were up slightly over the third quarter of 2008. A decrease in sales at Colonial Penn of 12% was offset by a slight increase in Bankers of 2%, and an increase in CIG of 7%. The decrease at Colonial Penn remains consistent with expectations associated with the marketing cost reductions that were undertaken earlier this year as part of our capital management initiatives.

CIG's new business increase of 7% turns around three consecutive quarters of negative sales comparisons. Trailing four quarters collected premiums in the third quarter of 2009 were up 3% versus the comparable period last year. Agent recruitment continues to be strong and we'll walk through some of the details on that a little later in this presentation.

There were net realized investment losses in the third quarter of 2009 of $18.9 million. This included $35.7 million of other than temporary impairment losses recognized in earnings. Our accumulated other comprehensive loss, or AOCL, improved by $1.6 billion for the first nine months of 2009 and improved by $900 million during the third quarter, reflecting the increases in estimated fair value of our actively managed fixed maturity investments.

Book value per share, excluding AOCL, increased to $18.82 per share at September 30, 2009 from the year-end 2008 value of $18.41 per share. Book value per common share increased to $18.03 at September 30, 2009 from $8.82 at December 31, 2008. In October, we announced a series of capital markets transactions to effectively recapitalize the Company. This recapitalization is without a doubt one of the most important steps that we have taken as a company since my arrival at Conseco.

Next up is our CFO, Ed Bonach who will take us through the details of the recap as well as our third quarter financial data. Ed?

Thanks, Jim. The recapitalization transactions address our most pressing financial priorities, the refinancing of our existing 3.5% convertible debentures. The transaction were structured to protect our NOL's while preserving the ability to raise additional common equity and also improving financial covenant margins and increasing liquidity. The recapitalization involves the private placement of common stock and warrants at Paulson and Company and the issuance of new convertible debt to redeem, repay, or call the existing convertible debt and a tender offer for the existing convertible debenture.

The first step of the recapitalization was entering into a stock purchase agreement with Paulson to sell 16.4 million shares of common stock and 5 million warrants which will have an exercise price of $6.50 per share for gross proceeds of $77.9 million. The warrants will not be exercisable prior to June 30, 2013 and will expire on December 30, 2016. The closing of the common stock and warrant sales expected to occur at the conclusion of the tender offer for the existing convertible debentures which is scheduled to expire on November 12. Upon closing the private sale of common stock, Paulson will own approximately 9.9% of Conseco's outstanding shares, including shares that Paulson previously acquired in open market transactions. One-half of the net proceeds from the issuance of these shares will be used to repay indebtedness under our senior credit facility and any remaining proceeds will be available for general corporate purposes.

We also announced an agreement to sell up to $293 million of 7% convertible senior debentures due 2016 in a private placement offering. The new debentures will not be convertible prior to June 30, 2013. Commencing on that date, the debentures will be convertible at $5.49 per share which represents a 10% premium to the closing sale price of the common stock on the date prior to the announcement. We will have the option to terminate the conversion feature on or after June 30, 2013 if our stock is trading at or above $7.69 and has been at that level for at least 20 of the last 30 trading days.

Paulson and Company has agreed to buy up to $200 million of the convertible debenture issue. The closing of the private convertible debenture offering is expected to occur on one or more days. The earliest date would be upon settlement of the cash tender offer next week on November 13, and the latest date would occur on October 5, 2010 which is when the Company can call any of the 3.5% convertible debentures that remain outstanding.

Slide 7 offers a summary of the anticipated sources and uses of cash from the transaction. Half of the net proceeds from the issuance of shares to Paulson will be used to repay indebtedness under our senior credit facility as required by the credit agreement. The remaining half of net proceeds will be used to pay the portion of the purchase price of the existing convertible debentures that are not funded with any remainder available for general corporate purposes.

Slide 8 shows our September 30, 2009 consolidated capitalization and our capitalization as adjusted to give effects to the transactions as if they had occurred on that date. The table assumes that all existing 3.5% convertible debentures are tendered in the tender offer and that we issue all of the 7% convertible senior debentures to finance the tender. As shown on the slide, the debt-to-capital ratio excluding AOCL, reduces from 26.6% to 25.7% and the book value per share excluding AOCL decreases from $18.82 to $17.60. The slide does not take into account our proposed registered offering of common stock.

Turning to slide 9 and third quarter results, collected premiums on the trailing fourth quarter basis is shown here. And the change is primarily due to the termination of the PFFS group quota share contract at Bankers and the slight decline at CIG, due to de-emphasizing annuity sales. As you can see on slide 10, our net operating income was $54.3 million for a deferred tax valuation allowance, equated to $0.29 per share for the third quarter, compared to net operating income of $58.3 million in the third quarter of 2008 or $0.31 per share.

For the third quarter, net income applicable to common stock was $15.4 million which includes $38.9 million of net realized investment losses and valuation allowance for deferred tax assets, compared to a net loss of $183.3 million in the third quarter of 2008, which included $241.6 million of net realized investment losses and losses related to discontinued operations. This equates to net income of $0.08 per share for the third quarter, including $0.21 per share of net realized investment losses and valuation allowance for deferred tax assets, compared to a net loss of $0.99 a year ago which included $1.30 of net realized investment losses and losses related to discontinued operations.

Turning to slide 11, the Company again had operating income in all three insurance segments. Year-over-year total EBIT increased to $107 million in Q3 of '09, compared to $104.8 million a year earlier. In our Bankers Life segment pre-tax operating earnings were $85.4 million in the third quarter, up 26% compared to the third quarter 2008. Results for the third quarter were primarily affected by an increase in earnings of approximately $20 million from the PFFS business, primarily due to increases in our share of risk-adjusted premium payments made by the federal government's Center for Medicare and Medicaid Services.

Also an increase in earnings of approximately $7 million related to our company-owned life insurance policies which were purchased to fund the segment's deferred compensation plan for certain agents and a reduction in earnings of approximately $7 million from long-term care product margin, primarily from higher claim expense and a decrease in premiums following policy lapses. In our Colonial Penn segment, the pre-tax operating earnings were $7.4 million in the third quarter of 2009, up 14%, from the third quarter of 2008. Results for the third quarter of 2009 reflect business growth and favorable mortality experience compared to the same period last year.

In our Conseco insurance group segment, pre-tax operating earnings were $21.6 million in the third quarter of 2009, down 37% compared to the third quarter of 2008. Results for the third quarter of 2009 were primarily affected by a reduction in earnings of approximately $7 million, related to lower investment earnings due to decreased yields and the timing of changes, certain nonguaranteed elements on Lifetrend life insurance products, resulting in additional amortization expense and a reduction in earnings of approximately $3 million due to the settlement of several lawsuits.

We continue to work with the state regulators with regard to our management of nonguaranteed elements included in many of our legacy policies. The corporate operation segment includes our investment advisories, subsidiaries, and corporate expenses. Corporate interest expense reflects both the higher interest rate paid on debt following the amendments for a credit facility in the first quarter of 2009 and higher average debt outstanding.

Net realized investment losses in the third quarter of 2009 were $18.9 million, net of related amortization and tax. Such net realized investment losses includes other than temporary impairment losses, or OTTI, of $35.7 million. Net realized investment losses in the third quarter of 2008 of $84.2 million included $50.1 million of OTTI. Eric Johnson, our Chief Investment Officer, will address this in more detail later in the presentation.

The results for the third quarter of 2009 also reflect the previously disclosed increase to the deferred tax valuation allowance of $20 million that we established upon the completion of the reinsurance transaction with Wilton Reinsurance Company or Wilton Re. This reinsurance transaction involves two of our insurance companies in the Conseco Insurance Group, co-insuring approximately 104,000 noncore life insurance policies. The results from the third quarter of 2008 include a $157.4 million loss from discontinued operations related to the agreement to transfer the stock of senior health insurance company to an independent trust. This transfer was completed in the fourth quarter of 2008.

Slide 12 shows 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. ROE on this basis remained level with the prior quarter at 6.9% with the four quarters ended September 30, 2009. Net operating income for the third quarter was $54.3 million,or $0.29 per share. This compares with net operating income in the third quarter of 2008 of $58.3 million or $0.31 per share.

The Q3 '09 operating income excludes $18.9 million of net realized investment losses. Including these net realized investment losses, results in net income applicable to common stock per share of $0.08 as compared to a $0.99 loss per share in the third 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 14 details the primary financial covenants which reflects the changes as a result of the credit facility amendment in March. As a quick reminder, the amendment provides for relief on the financial covenant through June 30, 2010. The covenants revert back in Q3 of next year to the levels applicable prior to the amendment. We remain in compliance with the financial covenants of our credit agreement and we closely monitor our covenant margins.

Our debt-to-total-capital ratio, calculated excluding AOCL, improved to 26.8% at September 30, 2009, compared to 27% at June 30, 2009. Risk-based capital at our insurance companies improved in the third quarter to 252%. I will touch on this more in a moment. The margins for adverse development and the financial covenant from the September 30, 2009 levels are detailed on page 51 in the appendix of this presentation. We will continue to evaluate and pursue strategic moves to bolster our capital position going forward, which I will also cover in more detail shortly.

Holding company liquidity increased during the third quarter with approximately $86 million of cash as of September 30, 2009. Our current liquidity projection shows that December 31, 2009 cash balance of approximately $73 million. The projected decline is largely due to the first principal payments on the senior health insurance notes later this month. With respect to the recapitalization, this projection assumes a 100% tender of existing 3.5% convertible debentures in the fourth quarter of 2009 and that net cash remaining from the private equity offering remains at the holding company.

Our liquidity at the holding company is impacted by the performance of our insurance subsidiaries. Our insurance companies currently are expected to generate approximately $200 million in statutory operating profits annually, excluding extraordinary items. The statutory dividend capacity of the insurance subsidiaries is in the range of $50 million to $125 million annually. 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 third quarter by 5 points. The change from Q2 was impacted by several factors. Positively impacting the ratio during the quarter were the strong third quarter statutory operating results and the positive impact of the Wilton reinsurance transaction. Partially offsetting these positive improvements were decreases to the RBC ratio, due to the investment markets environment that negatively impacted some of the components of RBC due to realized investment losses, bond downgrades and impairments.

Slide 17 is a water fall chart showing the major impacts to RBC for the period September 30, 2008 through September 30, 2009. Our RBC has taken a 98-point hit due to investment losses, ratings downgrades, and investment impairments over the past year. Even so, our operating performance, combined with the management actions we have taken to build capital and manage risk, offset all but 5 percentage points of that hit.

Capital and risk management continue to be a primary focus. As part of our capital and risk management efforts, we have been working on several initiatives. We continue to evaluate reinsurance opportunities.

During the third quarter, we completed the previously-announced reinsurance agreement with Wilton Re, which resulted in an increase to our consolidated risk-based capital ratio of 10 percentage points, along with increasing statutory capital and further simplifying our administrative operations. As a result of the transaction, we recorded an increase in our deferred tax valuation allowance of $20 million in the third quarter of 2009 and a deferred gain of $26 million, which will be recognized over the remaining length of the block.

In the first six months of 2009, the block being co-insured, generated GAAP after-tax earnings before overhead of approximately $5 million. In addition, we have also increased the ceeding percentage on our Bakers health [EG] new business reinsurance with RGA from 50% to 70% for 2009 business with 50% for 2010 and beyond. With respect to our investment portfolio, we will continue to manage it so as to mitigate where possible the RBC impact of ratings migration. In conjunction with Coventry's decision to exit the PFFS market, our participation in the associated quota share reinsurance contracts will end on December 31, 2009. This is anticipated to benefit our consolidated RBC by approximately 8 points in 2010.

To remind you, with respect to operations, we have done a couple of things from a capital management perspective. We have limited Bankers branch expansion and reduced certain elements of our direct response lead generation spending at Colonial Penn. We do not expect either of these actions to have a significant impact on earnings for 2009.

Finally, there are several items on the regulatory front of note, which we believe could benefit the Company and have a positive impact on our capital position. First, we announced our merger -- or planned merger of three insurance companies that is estimated to add 8 points to RBC. The positive impact of accounting for deferred tax assets approved by the NAIC is expected to contribute an additional 2 points to RBC with 10 points already incorporated from the current permitted practice. The anticipated extension of the mortgage experience adjustment factor relief beyond the end of 2009, which would result in a 25-point decrease in RBC if not extended, and the NAIC changes anticipated with respect to the modification of the RMBS rating, which we estimate could positively impact RBC by more than 10 points.

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 $85.4 million, a 26% improvement over the prior year. The main drivers positively affecting earnings were higher private fee-for-service income due to mid-year premium sweeps and favorable IBNR development and higher investment returns on our COLI program. These earnings were slightly offset by lower than expected long-term care margins due to a higher interest adjusted benefit ratio.

Our core sales for the quarter were $62.5 million, which was up 2% over the same period last year. It is noteworthy that in the third quarter, Bankers achieved record third quarter sales in both our life and Medicare supplement lines. Bankers also had continued success in the recruitment of agents with new agent contracts up 16% on a year-to-date basis. The next page has more details on our sales results.

As I mentioned, the third quarter was highlighted by strong sales of life, up 21%, and Medicare supplement, up 20%, over the prior year. Annuity sales were down 15% and long-term care sales were down 14%. The declines in the long-term care and annuity lines were consistent with the overall industry declines.

On a year-to-date basis, private fee-for-service sales are down 30% from last year, mainly due to customer preferences which have impacted gross submissions and a refocus of our agency force on the Medicare supplement market. In addition, we stopped selling Coventry private fee-for-service at the beginning of the third quarter and will be marketing med advantage plans through Humana beginning in the fourth quarter. Moving on to our 2009 year-to-date sales and distribution results, as I mentioned earlier, we have continued to have success recruiting in both the volume and quality of candidates and now have an average agent count of 5,186 as of the end of the third quarter. This represents a 10% increase from 2008.

I would also like to comment on our success in retaining distribution management. We have continued to make a commitment to the growth and development of our field management. Looking at the agency managers in our top 48 performing offices, we have experienced turnover rates since 2004 of less than 3% annually. In addition, agency managers in these same offices have an average length of service at Bankers in excess of 15 years. Overall in the management ranks, voluntary terminations are at an all-time low.

Moving on to the Medicare lines, as was previously announced, Coventry is exiting the private fee-for-service business affected 12/31/2009. This termination affects approximately 55,000 Bankers sold private fee-for-service members which are partially reinsured by Bankers. We are currently reaching out to these customers to offer a variety of options, and early results indicate many of these policy holders are choosing a Medicare supplement option as sales are up significantly versus the prior year. The Humana Medicare advantage product has been available for sale since October 1 for customers who previously had Coventry or another terminated Medicare advantage plan. And sales will begin in earnest for the entire market during the annual election period beginning on November 15.

Slide 23 illustrates the continued shift in annuity sales between fixed and indexed annuities 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 percentage of indexed annuities decrease from 60% to 29% of total annuity sales. The overall decline in annuity sales is consistent with the overall industry trends. Additionally impacting sales, has been a reduction of our bonus crediting rate offering. As underlying yields have decreased, we have reduced the bonus in order to maintain margins.

Turning to slide 24, during the quarter, Bankers saw few surrenders versus the prior year for both fixed and equity indexed annuities. Additionally, we have seen a significant decline in surrenders sequentially in both lines. We believe the main driver for this decrease is the current interest rate environment, reducing the availability of attractive alternatives. It is important to note that 89% of our total annuity block remains in the surrender charge period.

Turning to slide 25, you can see an update to the progress being made on the long-term care re-rate that is in its final stages. As a reminder, this re-rate impacts about half of the Bankers long-term care business. As of the third quarter, we have achieved 109% of our targeted goal with an expected financial impact of $58.1 million.

On the long-term care product front, we continue to gain traction with our annuity long-term care combo product which will help diversify our risks inherent within our long-term care block of business. Sales have been strong and thus far, have exceeded our initial expectations. Also in the third quarter, we gained additional state approvals on our updated version of our existing standalone long-term care products with higher rates, reflecting our current claims experience and profit targets.

Lastly, here we see the impact of the earnings items previously discussed, producing an ROE on a trailing four quarters basis of 10%. Now, I will turn it back over to Ed to cover Colonial Penn and CIG results. Ed?

Thanks, Scott. Turning to slide 27, Colonial Penn's earnings in the third quarter were $7.4 million, a 14% improvement from the third quarter of 2008. This increase is primarily the result of margin growth.

Life sales for the third quarter were $10.6 million, which is down 12% from third quarter 2008. This is generally consistent with expectations associated with the marketing cost reductions that are part of our capital management initiatives for 2009. During the third quarter, of 2009, we reduced our lead-based advertising and related fulfillment costs by approximately $5.3 million from the third quarter 2008 levels. This 45% reduction in marketing expenses has a direct and positive near-term impact on statutory earnings, capital, and surplus.

Turning to the next slide, we see that Colonial Penn's trailing four quarter return on equity is 14.9%. Looking at the CIG results on slide 29, third quarter earnings were down 37% versus Q3 of '08, primarily impacted by additional universal life amortization expense and higher expenses related to litigation settlement. Overall NAP increased by 7% over Q3 2008 which turns around three consecutive quarters of negative sales comparisons. This is significant in light of the NAP increase that has been seen with a de-emphasis on the annuity business. We also had continued strong sales growth in specified disease products and strong agent recruits.

Slide 30 illustrates the planned shift in CIG sales mix with specified disease sales up 26% over Q3 '08. Worksite sales increased 11% 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 165 new recruits for the quarter at our wholly owned distributor PMA. CIG sales, our independent channel, attracted 301 new agents, most of which specialize in the worksite market. The decrease in annuity sales from Q3 '08 is consistent with our focus on product lines with a greater contribution on profit.

And turning to slide 31, indexed annuity surrenders were down significantly from the first and second quarters of 2009. Surrenders on non-indexed annuities have remained relatively stable; 65% of segment total annuity block remains in the surrender charge period. Overall exposure to annuity products in the CIG has decreased significantly since the sale in 2007 of a $3 billion annuity block that was largely out of the surrender charge period. CIG operations now have been profitable for eight consecutive quarters and produced an annualized third quarter 2009 return on equity of 2.2%.

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

Thank you, Ed and good morning, everybody. We will go to slide 33 now. For the third quarter, we earned approximately $307 million in investment income, compared to $312.8 million in the third quarter of 2008 and $308 million in this year's second quarter. This represented an earned yield of 5.63% compared to 5.82% in the third quarter of 2008 and 5.65% in the second quarter of this year. Yields in new investments during the third quarter reflected fairly tightened money rates due to tighter credit spreads in many markets. In addition, during parts of the early parts of the quarter, we had a relatively high cash and short-term investment position which has been mitigated during the latter part of the quarter and currently.

Now, let's go on to slide 34. Slide 34 presents gains and losses in the third quarter. As you've heard, we realized 15.4 million in net gains on sales. That however was offset by OTTI losses of $35.7 million, recognized in earnings and $126.7 million recognized in AOCL. As a result, net investment losses totaled $18.9 million for the quarter.

Let's go on to slide 35, which breaks down the third quarter impairment losses by asset class. Commercial mortgage loans cost us approximately $12 million. Also during the quarter, like many market participants, increased our [cum] loss expectations for many RMBS sectors which led to the recognition of approximately $9 million in impairments, principally in ALT-A and prime jumbo sectors. I should mention here that our former investment in CIT was liquidated prior to the end of the quarter which lists in essence no economic effect on the quarter.

Let's go on to slide 36, which is a broad brush on asset allocation in mark-to-market as of 9/30. Unrealized losses narrowed by about $1.6 billion, as you've heard during the quarter. Some segments in fact reflected unrealized gains. A few segments continuing to reflect uncertain fundamentals; CMBS, jumbo, ABS, Alt-A, principally. In other words, structured securities.

Let's go on now to slide 37, which is a pie chart which breaks down our invested assets by ratings. As you can see, a BIG ratio decrease to approximately 7%, with downgrades which we will discuss later, basically offset by a significant sales of below investment grade corporate structured securities. And we are confident we will be able to continue to manage this ratio with a satisfactory level throughout the remainder of the year.

Going on to slide 38 -- slide 38 is about the impact of downgrades on the BIG ratio here at Conseco, which is -- we thought an interesting thing to illustrate. And it shows how downgrades on investment grade securities, both corporate and structured securities over time, really had a profound effect on our allocation to the below investment grade securities. That's where we are.

Let's go on to the next slide which is about downgrades from investment grade -- below investment grades, slide 39. And you can see during the third quarter, we had approximately $170 million downgraded from investments grade to below investment grade. The greatest effect is in CMO's, particularly Alt-A and prime jumbos. This is a trend which is likely to moderate in the fourth quarter. Going on to slide 40, slide 40 crystallizes the impact of downgrades and overall RBC. We are talking about 24 points in the third quarter and 54 over the trailing four quarters, which is significant to the Company.

Slide 41 is about our Alt-A portfolio, which is approximately 90 basis points of invested assets. This is an allocation that has been reduced by about half during the first nine months of the year, which has been a material portion of realized gain/loss during the first nine months, but it certainly had a significant benefit to the portfolio in terms of quality and stability. We are glad we did what we did.

This is the portfolio with better-than-average or better-than-typical quality characteristics for an Alt-A security and significant credit support, but reflects significant delinquencies and substantial mark-to-market deficits. During the quarter, this is one of the sectors where we increased our cum loss on a number of securities. Having done that, we do anticipate full recovery of our current carrying value and we will continue to monitor the estimates, as well as the results and that carrying value very closely.

Going on to the next slide which is about jumbos. Jumbos represent approximately 3% of invested assets. Even after all of the ratings actions that have happened during the year, this remains a highly rated -- relatively highly rated allocation. Delinquency trends continue to be unfavorable, but because we tended to buy securities that were not leveraged, i.e. were at the top of the securitization, we have significant amounts of credit support which will -- which suggests full recovery of our carrying value.

Next slide is about CMBS and it breaks down our CMBS portfolio by vintage and by ratings. This is a portfolio which has fairly significant seasoning and is fairly highly rated -- a very high proportion in the AAA and AA categories. Rise in delinquencies for our commercial mortgage securities are in the market as a whole is a reality.

While we have had some upward pressure on our -- the delinquency rates on our underlying collateral they still remain our -- approximately half of the overall market levels. Because of that, and because of the fairly highly rated quality of our exposure, we think this is a portfolio that will season out well for us. I think that's the message as well on the next slide, which is slide 44.

Going to slide 45, slide 45 is a quick snapshot of our commercial mortgage portfolio by vintage and property type and some very high level summary statistics on this portfolio which is approximately $2 billion and approximately 9% of invested assets. It is a very diversified portfolio with over 400 individual loans and which would put your average loan size under $10 million -- a very small number of large loans. I think the large individual loan is less than $50 million to just give you a point of reference.

Obviously, commercial mortgage fundamentals remain poor, although there hasn't been any significant change in the qualitative or quantitative characteristics of our portfolio during the last quarter. The various indicators that we look at around LTV or DSCR or delinquencies or the delinquency pipeline are in essence unchanged over the past three or four months. While we will see what the future will hold in that area, right now trends are satisfactory.

Backing up and making a general statement right now, obviously new money rates are tight. Aspects of the economy are returning to a condition of expansion. The credit markets are open today to a broadening range of corporate issuers, although there is still unsettled conditions and aspects of the structured securities market, particularly AVS and nonagency CMOs and CMBS as well. In general, there are two consequences to this. One is that there will continue to be pressure on new money raised and maybe some impact on income for next year. And second, this is an environment that may lead to a continuing trail of impairments which is a little higher than historical norms, so still within manageable ranges.

Given all of that, I believe we're in pretty good shape to produce what the Company needs for the rest of the year and into 2010. And with that, I will turn it back to Jim.

Thanks, Eric. In summary, at Conseco we continue to generate solid operating earnings and this is the third quarter in a row with net income after investment losses. Our core sales and agent recruitment continue to improve, despite what we have witnessed with many competitors in this very tough environment.

Our recapitalization addresses our most pressing financial priority and that is the refinancing of our existing 3.5% convertible debentures. The transactions were structured to protect are NOL while preserving the ability to raise additional common equity, and also improving financial covenant margins and increasing liquidity. And we believe the ability to complete such a transaction clearly demonstrates investor confidence in the Company.

Capital management will continue to be a top priority. We continue to evaluate reinsurance opportunities as they arise and make sense. And we anticipate successful completion of the insurance company's merger, which will also benefit the Company on a consolidated basis by reducing operating expenses and making it more capital efficient. The demographics of Conseco's target market continue to trend favorably. As a result of the baby boom, the number of Americans turning 65 each year will grow by nearly 4% per year for each year over the next decade.

We spent a lot of time and effort on the recapitalization of the Company, but we remain focused on running the Company more efficiently while continuing to profitably grow and manage capital wisely. We are clearly moving forward with our strategy of fix, focus and growth. And now we would like to open it up for questions. Operator?

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

Thanks for all of the details on capital. I just want to focus on a couple of the normalized earnings items at CIG with the Lifetrend product. Can you just provide a little bit more color on what's going on there? And particularly, just trying to figure out if this really is a one-time issue or if there is potential risk of this having further volatility in future quarters?

Thanks, Randy. With the Lifetrend policies, as we have disclosed previously, in the fourth quarter of last year, we voluntarily had a moratorium on implementing any nonguaranteed element changes while we work through questions and issues that certain regulators had. We continued to make progress in those discussions. However, it has taken us longer than we originally anticipated. With that somewhat longer timeline, we pushed out by two quarters our anticipation of when we will be able to adjust nonguaranteed elements. From that standpoint, that is our best estimate and we don't expect this to be recurring.

I take from that then you feel pretty good that the outcome will be favorable?

Yes. We believe it is clear that managing nonguaranteed element is our contractual right. It is more how do we best exercise that with the regulatory framework and oversight.

Okay. Great. And then switching over to Bankers, obviously you did disclose somewhat higher benefit ratio on long-term care. It is not a huge move, but it is a little over a couple hundred basis points on the interest adjusted benefit ratio.

Just was trying to get some color on what you might be seeing there that caused a little bit higher benefit on the long-term care. And again, that's at Bankers.

Right. We see the slightly higher benefit ratio at Bankers long term care to be within the normal expected fluctuations. You're right, it is not a huge number. I want to remind you, we got over $3 billion of reserves in that book, over 350,000 policies. A fluctuation like this is within the normal range of morbidity from quarter to quarter.

One more and I will drop back in the queue. With the recapitalization in process and the RBC leaning in the right direction, at what point would you think about reinitiating ad spends at Colonial Penn?

I would say that it could be as early as next year. From our perspective, one of the key gating items will be what is the NAIC does relative to various RBC items, and then of course what is the investment markets doing relative to potential downgrades and losses and impairments.

But -- and you said in the comments though, you think 10% on the RMBS rule that they're reviewing in a conference call today and is the anticipation still that you are able to keep MEAF?

We -- on the RMBC, we think it will be, as we understand it, at least 10 points. It could be higher. And at the same time, with the mortgage experience adjustment factor, all indications are they continue to move towards either extending relief or coming with a more permanent solution. Yet we're cautious given that -- it sounds like a repeat of what we and others were saying in the fourth quarter of last year. And they did not come through with any relief in '09 until recently.

Okay. Great. Thank you.

Your next question is from the line of Andrew Kligerman of UBS.

Good morning. A couple of questions. Just first, back on that Bankers long-term care benefits ratio. I think, Ed, you were indicating that -- or I got the sense you're pretty comfortable with that 70.4% ratio, even though it is up a little bit year-over-year. Do you think you can sustain it?

And then coupled with that, for slide 25, what are the overall rate increases being put in place over the next 12 months? What would be the average rate increase? I know you're doing it in a lot of different states.

Yes, I will have Scott Perry respond to the rate increases. But yes, we are comfortable with the roughly 70% benefit ratio as being within the normal expected range.

And Andrew, this is Scott. On the re-rates, we -- as I mentioned, we're in the final stages of implementing them. The re-rates will range based upon the gender and the age of the individual from 15% to 35%.

When do you expect to have that done?

We will have completed all of the re-rates, depending upon when individuals have their renewal, whether they're on a monthly, quarterly, or annual bill. We should be completed by the middle of 2010.

Okay. Then just shifting over to statutory numbers. What were the statutory operating net earnings in the third quarter of '09, if you have that?

We do. Hang on. It was roughly I believe $70 million, but we will get an exact number here in a minute. We will come back to that if you don't mind.

No problem at all. And then just shifting back to operations again, it looks like CIG is generating some pretty decent sales, particularly in specified disease. I had written off CIG just because you've got the BB ratings at the OPCOs. Maybe give a little color on how that is affecting sales, the rating that is, and what your outlook is for CIG.

Yes, Scott. From a ratings perspective, by de-emphasizing annuity sales, that's where the ratings did play a part in the independent distribution. We have been de-emphasizing that for over a year. Over half of our sales comes from PMA which we wholly own, and it operates more like Bankers in that it is focused on primarily specified disease. It is focused on rural America, farmers and ranchers, and really selling solely Conseco products.

I was pretty close on the statutory income. It was $67 million. And that includes -- that is after -- the insurance companies haven't expensed the payment on their surplus notes up to the holding companies or up to the insurance holding companies. That is after paying the surplus debenture interest.

That is the statutory operating number?

That is the statutory net income number.

That's the net income.

Operating net. Net income.

And then I can back out the losses if I want to get to that. Perfect. Thanks a lot.

The next question is from the line of Paul Sarran of FPK.

Good morning.

Good morning, Paul.

Ed, one question on Bankers and then maybe one or two more general questions. But on Bankers, it seems like the growth in agents is somewhat outpacing the growth in sales. Average agents up 10% year-to-date. Sales up 5%. And only up 2% this quarter. They're just a lag between hiring the agents and when they become productive? Or is there something else going on there?

No, you hit it. I will have Scott comment on it a bit more.

Yes, Paul. You hit it right on the head. The other thing to point out is unlike a lot of our competitors, we did not experience a sales slump last year. When you're doing comparisons to 2008, our comparisons are against an '08 that was actually -- it showed growth over the previous year.

But yes, there is a lag between the time you contract new agents and the time they get up to full productivity levels. If you look at our total agency force growth, it is at about, as you mentioned, 10%. There is a higher percentage of new agents in the mix and those new agents are less productive than veteran agents. It will take more time to get them up to full productivity level. We do expect a strong fourth quarter, especially in life and Medicare supplement as all those new contracts get fully trained and are up to full productivity levels.

Okay. Going back to the previous question on stat, I just wanted to confirm. That was net income, the $67 million? Or was that operating? Does that include realized losses?

No, it does not.

It does not. Okay. Is that about the run rate you would expect? It seems higher than it has been.

It is somewhat higher. Certainly, the PFFS premium sweep that we mentioned for Bankers positively impacted that. Then the somewhat slower sales growth year-over-year also helped statutory income as well as our other capital management initiatives, like the reduced spending at Colonial Penn.

Okay. And then one just more general question. Can you talk about what factors you see that will help you drive ROE expansion across businesses, but specifically at CIG? Is it just going to be layering on new business? Or are there things you can do on the existing block, re-rates, or expense management that will help that?

Certainly, layering on profitable new business is a key part of improving CIG's return. But we continue to focus on getting more efficient, consolidating systems. In the back half, we've been taking out expense. Then managing our nonguaranteed elements going forward is also a key part of improving their profitability.

Okay. Do you have a long-term ROE expectation for that business?

We think that it should be in the mid to high single digits within three years.

Very helpful. Thanks.

There are no further questions. I will now turn the call back over to Jim.

Terrific. Thank you very much, operator. I would like to thank everyone on the call for your continuing interest in Conseco. We are focused on an underserved market that is growing faster than the market overall and we look forward to presenting better numbers as we go forward. Thank you again.

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